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Cbautaiiqiia IRea&lng Circle literature 

OUTLINES ^^^'^ 

OF ECONOMICS 



RICHARD T. ELY, Ph.D., LL.D. 

Professor of Politicdl Economy and Director of the School of Economics, 

Political (Science, and History in the University of 

Wisconsin, Madison, Wis. 




-^^A</^>s, 






FLOOD AND VINCENT 
etc (Cbautauqua-(iCenturp ^tt0 

MEADVILLE PENNA 

150 FIFTH AVE. NEW YORK 

1893 




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5 



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Copyright, 1893, by 

HUNT & EATON 

New York. 



Composition, Electrotyping, and Printing by' 

HUNT & EATON, 

150 Fifth Avenue, New York. 



PREFACE 



When I began the present work I asked the assistance of 
Mr. H. H. Powers, then of the graduate department of the 
University of Wisconsin, and now professor-elect of Political 
Economy in Smith College, Northampton, Mass. I antici- 
pated help which could be passed over with little more than 
mere mention in the preface, but the aid received is so great 
that it becomes both my duty and pleasure to make particular 
acknowledgment of it and to state frankly that this book is 
a joint product. While I am primarily responsible for the 
whole, as according to agreement I have freely rejected, 
qualified, or accepted what has been done by Mr. Powers, it 
should be known that much credit is due to my fellow-worker 
for whatever success the book achieves. 

Mr. M. B. Hammond has rendered efficient assistance in 
the collection and critical examination of statistics, and Mr. 
J. W. Crook has read the proofs of the book and offered 
useful suggestions from time to time. I am also indebted to 
Mr. David Kinley for helpful suggestions. All of these 
gentlemen are connected with the graduate department of 
Economics in the University of Wisconsin, and I wish to 
express to them my thanks for their aid. Professors Turner 
and Haskins, of the same institution, have read the earlier 
chapters in the book, and I have to thank them for helpful 
criticism. 

The present book was begun as a revision of my Introduc- 



vi Pkeface. 

tion to Political Economy^ but it has become practically a 
new book, and the publishers will retain the older work on 
the market. This newer work is more theoretical, and perhaps 
naturally follows the earlier one. The Introductioyi to Polit- 
ical Economy^ which has been used in many schools and 
colleges, gives large scope to a teacher to develop his own 
line of thought, and may still be preferred by some who have 
become accustomed to it. In any future revision of the two 
books an effort will be made to develop still further the 
peculiar characteristics of each; the aim of the Introduction 
being to furnish chiefly historical and descrijDtive material; 
the aim of the Outlines being to give a systematic sketch of 
theory. 

The limits set for the present work have made it impos- 
sible to include a discussion of State revenues and taxation, 
as well as much other matter necessary to fit the book for 
school and college use. The matter thus excluded will be 
included in a larger edition issued simultaneously with this 
and designed especially for college classes. 

Madisok-, Wis., June, 1893. Richard T. Ely. 



TABLE OF CONTENTS. 



BOOK I. 

HISTORICAL INTRODUCTION. 

chapter i. page 

The Economic Life of Uncivilized Man 3 

CHAPTER II. 

The Economic Life of Semioivilized Man t 

CHAPTER III. 

The Economic Life of Civilized Man — First Stage 14 

CHAPTER IV. 

The Economic Life of Civilized Man — Second Stage 18 

CHAPTER V. 

The Industrial Revolution in England— Part 1 26 

CHAPTER VI. 

The Industrial Revolution in England — Part II 34 

CHAPTER VIT. 

The Industrial Revolution in England — Part III, 42 

CHAPTER VIII. 

Remarks on the Economic History of the United States 54 

CHAPTER IX. 

Tendencies to Reaction against a Passive Policy of Government 

IN THE United States ; • . ■ . 64 



viii Contents. 



CHAPTER X. PAGE 

The Nature op the Subject of Economic Study 72 



CHAPTER XI. 

Definition of Economics and its Relation to the Other Social 
Sciences 81 



BOOK II. 

PRIYATE ECONOMICS. 



PART I. 

PRODUCTION, 



CHAPTER I. 

Introductory §9 



CHAPTER II. 

The Factors of Production 99 

CHAPTER III. 

Organization of the Productive Factors Ill 



PART II. 

TRANSFERS OF GOODS. 

chapter i. 
Introductory 118 

CHAPTER II. 

The Origin and Organization of Exchange 127 



Contents. ix 



CHAPTER III. PAGE 

Money and its Yarieties 140 

CHAPTER IV. 

Changes in the Amount of Money — Bimetallism 150 

CHAPTER V. 

Credit and the Mechanism of Credit 157 



PART III. 

DISTRIBUTION. 

CHAPTER I. 

Definitions of Distribution and Rent , 166 

CHAPTER II. 

Rent "With and Without Free Land. . . 113 

chapter iii. 
Wages 180 

CHAPTER IV. 

The Labor Movement 187 

CHAPTER V. 

Profit Sharing and Cooperation 199 

chapter vi. 
Interest and Profits 209 



PART IV. 

CONSUMPTION". 

CHAPTER I. 

Introductory 219 

chapter ii. 
Consumption and Saving 224 



X Contents. 



CHAPTER III, PAGE 

Luxury • 230 

CHAPTER IV. 

Harmful Consumption <. 236 

CHAPTER V. 

Crises and Analysis of Consumption , o ...,». 242 



BOOK III. 

PUBLIC ECONOMICS. 

PART I. 

PUBLIC INDUSTRY AND THE RELATION OF THE STATE TO 
PRIVATE ENTERPRISE. 

CHAPTER I. 

Introductory 249 

CHAPTER II. 

Fundamentals — The Right of Priyate Property 25*7 

CHAPTER III. 

Fundamentals — G-uaranteed Privileges 265 

CHAPTER IV. 

State Participation in Industry 271 

CHAPTER V. 

State Regulation op Industry 2^9 

CHAPTER VI. 

State Regulation of Industry by Positive Statute 287 



Contents. xi 



CHAPTER— VII. PAGE 

State Management of Industry 295 



CHAPTER VIII. 

Socialism , , 308 



PART II. 

STATE EXPENDITURE. 

CHAPTER I. 

Introductory 316 

CHAPTER II. 

Expenditures for Security 824 

CHAPTER III. 

Expenditures for the Poor and Unfortunate 329 

CHAPTER IV. 

Expenditure for Education 336 

CHAPTER V. 

Expenditure for Commerce, Diplomacy, and Government 343 



BOOK I, 



HISTORICAL INTRODUCTION. 



CHAPTER I. 

THE ECONOMIC LIFE OP UNCIYTLIZED MAN. 

Without troubling ourselves at present about exact defi- 
nitions, let us notice wliat kind of history we have before 
us. The history of literature, the history of government, 
the history of religion, and many others, all have one thing 
in common: they are all of them histories of man. They 
each treat of man, however, in one line of his activities. So 
with economic history. Its subject is man, but it deals pri- 
marily not with his thought or his government or his wor- 
ship, but with his efforts to get a living. If any one is 
tempted to think this a narrow subject he should remember 
that it means more than bread and butter. Literature, 
science, art, religion, government, all require, not only bread 
and butter for those employed in them, but books and j^apers 
and laboratories and art galleries and churches and court- 
houses — all of them a part of man's " living,"^ It is plain 
that every kind of activity depends on material things to 
some extent. So this subject of ours — man in his effort to 
acquire and to use material things to satisfy his wants, or, in 
other words, to get a living — is of interest to everybody and 
to every kind of human effort. 

The various ways of getting things may be roughly re- 
duced to two: one must ^^<^ things, or else one must mahe 
them. Of course these two ways shade into each other, but 
they are sufficiently distinct for our purpose. Uncivilized 
man finds things; civilized man makes things. Indeed, 
material cwilization consists largely in wanting many things 
and in learning how to make and to use them. 

The Hunting and Fishing Stage. — The first want is 
food, and the primitiv© man, who has not learned to make 



4 Outlines of Economics. 

or " raise " it, must depend upon what he can find. Wild 
berries and roots will count for something, but plainly not 
for much. He must live principally on game and fish. It 
has been suggested that as man has to fight many animals to 
keep them from eating him he naturally eats them when he 
kills them in the fight. This would hardly seem to be a sat- 
isfactory account of the origin of the use of animal food, for 
as a rule the animals dangerous to man are not those he eats, 
but it is possible that the attacks of wild animals may have 
helped to accustom man to slaughter animals generally, and 
this may have rendered it easier to kill even men. Hunting 
is the first thing in which man learns skill. 

Another thing that sometimes arises at this early stage is 
cannibalism. Cannibals are not simply very wicked men, 
but men who are very ignorant and very hungry. Inasmuch 
as they do not know enough to help Mother Nature to raise 
food she furnishes very little. A tribe of hunting savages 
is said to require fifty thousand acres per person to live on. 
Now, as we know, the human race tends to multiply rapidly. 
Hence they live continually on the verge of starvation. If 
we remember that even civilized peoples are guilty of occa- 
sional cannibalism in times of famine we shall not be sur- 
prised that uncivilized man should be guilty of it frequently 
when he has to choose between that and starvation. The 
subject of cannibalism is one which does not appear to have 
been sufiiciently investigated, but the practice is often con- 
nected with war and religious rites. If begun as a result of 
hunger it would seem not unnatural that it should be con- 
tinued for other reasons by an ignorant and degraded tribe. 

However, we must not suppose that the lowest savages 
ever killed and ate one another indiscriminately. No body 
of men ever existed on the basis of " every man for him- 
self." In the lowest stages men respected family ties, and 
these in a larger and larger circle, till a tribe was the result. 
Within the tribe men were brothers who shared what they 
had with each other. Outsiders were enemies, to be robbed, 
killed, or eaten as the circumstances might require. 



The Economic Life of Uncivilized Man. 5 

Let us notice very carefully this fact which wc find at the 
very bottom of human life, in the lowest tribes of which we 
know anything. Man never leaves all his fellows to their 
fate. Even while as yet he is little more than an animal he 
begins to be a moral ayiimal^ setting bounds to his own lib- 
erty and imposing upon himself certain duties. Of course 
liis morals are crude and his circle of brotherhood narrow, 
but they are facts. We have said that material civilization 
consists in wanting many things and in learning how to 
make and to use. them. Moral civilization consists in per- 
fecting the duties and enlargiyig the circle of brotherhood. 
From the beginning until now man has divided his fellows 
into those who were to be fed and those who v.'ere, figura- 
tively at least, to be eaten, and his progress is measured by 
the proportion between the two. 

What has been said of hunting tribes applies with slight 
changes to fishing tribes. The difference of occupation is 
due to location. On the whole, however, fishing requires 
more skill and more tools than hunting, and so these tribes 
are as a rule slightly more advanced, and they are more 
likely to advance to a higher stage in a near future. But 
primitive fishing, like hunting, is a precarious means of get- 
ting a living, and leaves those who follow it in a low social 
condition. Of course there is little buying and selling under 
such circumstances.* 

So long as man depends for his living upon what Nature 
furnishes of her own accord population is thin, poverty ex- 
treme, starvation frequent, and war and cannibalism a natural 
outcome between the small and scattered tribes. To be rich, 
man must learn to want and learn to make; to be strong and 
safe, he must learn the meaning and extent of brotherhood. 
We shall see as we o^o on how impossible it is either to de- 
velop or to study these things separately. 

* There is said to be little buying and selling to-day among the inhabit- 
ants of Iceland, because nearly all produce substantially the same things, 
2 



Outlines of Economics. 



SUMMARY. 

1. Economic history is the history of man in his efiforts to get a living; 
tliat is, to get tlie things needed in all his activities. 

2. He may find things or make them ; uncivilized man finds things; civ- 
ilized man makes them. 

3. Material civilization consists in the making and using of things; moral 
civilization in the development of brotherhood. 

4. Uncivilized man fi.-hes and hunts. Scarcity of food makes him a 
fighter and sometimes a cannibal. 

5. Even the savage is a moral animal, and limits his depredations by self- 
imposed duties. 

QUESTIONS. 

1. How much is included under the term "living?" Wliat are tlie 
ecoiiomic elements in religious work ? in educfition? in government? 

2. What two ways are there of getting things ? In which way can man 
get more ? 

, 3. "What is civilization? What two kuids and the difference between 
them ? What are the advantages of material civilization? 

4. What is the cause of cannibalism? its limits? its cure? 

5. Is moral civihzation dependent on material civilization? If so, how? 

LITERATURE. 

English works bearing upon the economic aspect of the developments of 
civilization are inadequate. The following may be read w iih profit: 

Lubbock, Sir John: Prehistoric Tir)ies, particularly tiie last chapter; also, 
Origin of Civilization and Primitive Condition of Man. 

Wilson, Dr. Daniel: Prehistoric Man, dealing chiefly with natives of 
America. 

Morgan, L. H. : Ancient Society. 

Trior, E. B. : Anthropology. 

Druramond, Henry: 7?^02>^■cfli 4/^r^■ca, especially chapter iii. 

Stanley, Henry M. : In Darkest Africa. 

Gomme, Gr. L. : The Village Community. 

Reports of the Bureau of Ethnology connected with the Smithsonian In- 
stil utiou, Washington. 



CHAPTER II. 

THE ECONOMIC LIFE OF SEMICIYILIZED MAN. 

Between the uncivilized man, who uses what he can find, 
and the civilized man, who "makes what he wants, there is a 
middle ground. The man of this period neither depends on 
what he finds nor yet makes things to any great extent, but 
he "raises" his living ; in otlier words, to a limited extent 
he has learned to give direction to the forces of nature. He 
has learned to produce, but he lives on " raw materials," not 
knowing how to work them up. Man very soon makes a few 
simple tools like bows and arrows and the early stone imple- 
ments, as knives, hatchets, and arrowheads; but with this 
exception it is worthy of note that as man begins to subdue 
nature he begins not with dead nature, but with living na- 
ture ; he uses not metals, but animals and plants, and learns 
to increase their amount. Moreover, of these two kinds of 
living things, he first subdues the higher life, that most like 
his own, and not until long after learns to control plant life 
for his uses. 

The Pastoral Stage. — Man may have tamed dogs for 
hunting and sometimes horses while still in the hunting stage, 
but the pastoral stage begins with an extensive pasturing of 
animals for food and clothing. Man no longer depends upon 
hunting; but having learned that if he is to have animals in 
plenty he must take care of them, not simply kill them, he 
gains their confidence and now has flocks and herds. Some 
marked features of the preceding stage still continue. While 
man now lives upon his flocks the grasses and plants upon 
which they feed are still left to themselves ; the flocks still 
live on what they can find. So, while man no longer needs 
to wander in search of food for himself, he must do so for 



8 Outlines of Economics. 

his flocks. Cities are, therefore, still impossible. Moreover, 
while the land will now support many more inhabitants than 
before, much land is still needed to pasture the flocks, and 
as the tribes or families roam about at will they frequently 
come into collision and fight over desirable pastures. Thus 
war continues, keeping down the population, but with one 
important change. Cannibalism ceases. For a long time 
the victims of war continue to be slaughtered, but men with 
flocks at their disposal do not feed upon human flesh. Doubt- 
less even this is an advance toward brotherhood, for it re- 
moves one inducement to war and so paves the way for its 
final abandonment. Then, too, men very slowly begin to see 
that war is disastrous, scattering their flocks and destroying 
their wealth. Thus it is clear that on the whole property 
tends to make men more humane, although this tendency 
may be one working within comparatively narrow limits. 
War becomes somewhat more difticult wdien men have prop- 
erty to lose, although the pursuit of wealth has itself been 
the cause of many wars. 

The history of Abraham gives us examples of pastoral 
society and warfare, also of the peaceful settlement of difti- 
culties between Abraham and Lot. Evidently these men are 
afraid that war will i-esult in their mutual impoverishment. 
Still it is worthy of note that they were kinsmen, and perhaps 
would not have made this arrangement but for the feeling, 
known from the first, that kinsmen must not make war upon 
each other. War still remains common— due, as we have 
said, to overcrowding, to the wandering habit of the peo- 
ple, and to human passions of all kinds. It is in this stage 
that those great migrations occur, so unlike anything we 
now know, whole tribes leaving their country and seeking 
a new one, dri\ ing out the former inhabitants before them. 
Many individuals do the same thing to-day ; but who ever 
heard of a whole city, still less a whole country, being aban- 
doned in our day by its inhabitants? That happens only 
in this early stage, while as yet men are used to a wander- 
ing life. 



The Economic Life of Semicivilized Man. 9 

It follows from what we have said that there is very little 
ownership of land at this time. Tribes as a whole lay claim 
to certain districts and try to keep other tribes from pastur- 
ing on them. But individuals own either no land or very little, 
and it is doubtful whether even the tribe would claim any- 
thing quite like ownership in our sense so long as land is 
used only for pasturage. The notion of ownership develops 
as land becomes more useful. 

In this stage there are frequently great accumulations of 
wealth, such as it is. It consists mostly of great flocks, and 
gold, silver, and precious stones, which early appeal to the 
barbarian taste for showy ornament. Wealth produces, as 
everywhere, extremes of condition, the rich and poor being 
sharply contrasted with each other. But this early wealth 
does not produce commerce to any considerable extent. The 
reason is plain. In order to have trade we must not only 
have wealth, but diversity of wealth. There is in general 
very little reason why men should exchange one ox for 
another, and as this is about all the primitive " cattle king " 
can do, trade does not develop. Of course there is some lit- 
tle exchange besides this. The precious metals are obtained 
in this way by the wealthy, and finely woven fabrics may be 
procured from a wandering merchant. 

The AgriCTiltural Stage. — Man's next accomplishment 
is of immense importance. He has learned to manage ani- 
mals to his advantage ; he now learns to manage plants and 
"raise" them at will. The effect is almost incalculable. 
The first result is to increase population immensely. The 
soil which formerly maintained a handful of herdsmen with 
their scattered sheep now supports a whole community. The 
second result is even more important. Men cease to roam 
about and settle in one place. Now, nothing is more neces- 
sary for human development than that men should live in 
definite places and have homes and a country. This results 
at once in new relations between men, new duties, new arts, 
and new possibilities. A man never accomplishes much in 
this or any other age till he settles in a definite territory ; 



10 Outlines of Economics. 

and in the slow development of the race the taking up of 
agriculture was a decided advance.* 

A third result which came naturally though gradually was 
the private ownership of land. The cultivation of the soil 
required a good deal of detailed personal attention, and some 
sort of a division was necessary in this work. We must not 
suppose, however, that this first parceliu;^ out of the soil re- 
sulted immediately in private ownership. The tribe still 
owned the land, and the division was only a temporary one 
for purposes of convenience. Strangely enough, the first 
owners of the soil were in many countries not the cultivators, 
hut the chieftains of the tribes, an ownership which became 
very important in its later consequences, as we shall see. 

But the most important characteristic of this period is 
slavery. Men now cease to kill their prisoners of war, but 
make them slaves instead. Slavery begins long before agri- 
culture, but it now attains its full magnitude as an institution. 
It is hard work to till the soil, and men, especially primitive 
men, are not fond of hard work. So they save the lives of 
their prisoners in order themselves to be spared the neces- 
sity of work. This is a poor reason for becoming humane, 
perhaps, but it is well to become humane even for a poor 
reason. There have been many discussions as to whether 
slavery is right or wrong. It is both. There is a time in 
human development when slavery represents a step in human 
progress, the best and longest that men are able then to take. 
Such a step is always right. It is wrong when men have 
learned how to do better. The slavery of the early period 
we are now considering was not only inevitable, but, inas- 
much as slaves, like other property, were seldom bought and 
sold, it was very mild. The existence of a large slave popu- 
lation, however, which can be kept regularly at work greatly 

* The Book of Job gives us a fine picture of an early ngricultural stage. 
The plow was in use, but wealtli was estimated in "live stock." His "sub- 
stance was seven thousand sheep, and three thousand camels, and live hun- 
dred yoke of oxen, and five hundred she asses, and a very great household; 
so that this man Avas the uroatest of all the men of the east," 



The Economic Life of Semicivilized Man. 11 

increases the wealth of society. We now know that free 
labor is better than slave labor, especially in the later stages 
of industrial development; but, inasmuch as primitive man 
is with difficulty induced to work at all, slave labor is a great 
improvement on free idleness. Of course all that we have 
said is subject to many exceptions, for as men develop they 
become more diverse. Among some peoples slavery never 
became an important institution, while in others it was highly 
developed, affecting their entire social life. 

With every increase of wealth the tendency to trade in- 
creases, but as yet the occasion for it is comparatively slight, 
for men's wants and wealth are still much the same every- 
where. Fixed residence develops village communities — not 
cities; these have a different origin — and these have little to 
gain by trading wdth others like themselves. Such trade is 
usually by barter; that is, goods are exchanged for goods, not 
for money. Money does not at this time perform important 
functions in the life of every day. 

But we must notice the change or enlargement in men's 
ideas during this period. This w^e shall find in their laws 
and customs; the Mosaic code is our best example, as it w^as 
designed to govern a people in the pastoral and agricultural 
stages. Before this time there w^ere numerous customs reg- 
ulating life, and there may have been such a thing as even 
the tyranny of custom, but we are struck wath the immense 
increase of duties and restrictions which are now recognized. 
With fixed residence has come the State, with its institutions 
of justice, guidance, and protection, its numerous thou shalts 
and thou shalt iiots. At every turn w^c see that men may not do 
as they please, but that they are restricted, or perhaps, rather, 
have restricted themselves for their own good. Why all this, 
when we saw comparatively little of it before ? Simply be- 
cause men are now become permanent neighbors, and they 
have need of an understanding on many points to keep from 
trespassing on each other's libert}^ ' If men are to live close 
together and accumulate property and enjoy it in peace 
there must be general agreement among the many and vig- 



12 Outlines of Economics. 

orous compulsion for the few on many points. And so again 
interests of property and person lead men to recognize du- 
ties and establish laws which they learn to obey later as a 
matter of sacred honor, even though it cost them life and 
property to do so. It is noteworthy, however, that these 
duties and laws are chiefly recognized at home. Beyond the 
boundaries of the tribe or nation these duties are scarcely 
held to be binding at all. In the early German communi- 
ties, when the scattered tribes were still small and separated 
by unoccupied land, each tribe lived in relations of brother- 
hood within itself, property being common and mutual 
rights closely guarded. But between different tribes no rules 
held. When they met on the neutral ground or Mark, as it 
was called, to trade, all kinds of sharp practice were deemed 
admissible. Things not to be thought of at home were here 
unquestioned. This Mark and the trading that took place 
in it suggest our modern market, and even if the word 
market is not derived from the word Mark, as their simi- 
larity would indicate, it probably gets some of its practices 
from the trading in this neutral ground. Thus we still see 
the division with which we are already familiar into those 
who are protected from man's rapacity by moral restrictions 
and those who are not. 



The Economic Life of Semicivilized Man. 13 



SUMMARY. 

1. Between the finding of things, which is savager}', and the making of 
things, wiiich is civilization, comes a period of " raising " things, or semi- 
civilization. 

2. The domestication of animals assures subsistence, helps to stop canni- 
balism, introduces slavery, checks war, and creates wealth, 

3. The cultivation of the soil fixes residence, extends law and custom, 
and develops tribal ownership of land. 

4. Barter trade begins with a different code of law, and lionor for neighbors 
and strangers, much to the disadvantage of the latter. 

QUESTIONS. 

1. What part of nature does man subdue first? Why? 

2. Why does the hunter not accumulate wealtli? Why does he not own 
land? Why does the shepherd not own land? What advantage has the 
shepherd o"er the hunter? 

3. What influence has agriculture on wealth, and why ? on slavery ? on 
law? on moral civilization? 

4. What was the Mark'? its code of honor? How much does this code 
correspond with our present market code? 

LITERATURE. 

Maine, Sir Henry: Ancient Law; Village Communities in the East and 
West; Early History of Institutions; Early Laio and Custom; especially 
chapter viii in the last work. These four works are standard. 

Seebohm, F. : The English Village Community. 

Allen, W. F. : Monographs and Essays. 

Wallace, Mackenzie: Russia, contains a popular account of Russian com- 
munities. 

Stepniak: Russia Under the Tsars, contains a clear account of the Russian 
village community, the Mir. A cheap edition is published in Harper's 
Franklin Square Library, 

Note.— The works enumerated at the end of these chapters often bear upon the sub- 
jects of other chapters as well, but to save space we shall mention works hut once, 
except iu cases of special Importance. No attempt is made to make the enumeration 
a complete bibliography. 



CHAPTER III. 

THE ECONOMIC LIFE OF CIVILIZED MAN— FIRST STAGE. 

It must not l>e supposed that these periods are sharply 
defined in date or character. They shade into one another 
gradually, and come at very different times for different 
peoples. But, nevertheless, most peoples pass through these 
stages, and at any particular time a given kind of economic 
life will be found to be dominant among a given people. 

We have said that civilization begins with making things, 
or, if we prefer a longer word, manufacture. This is of two 
kinds, hand manufacture and j^ower manufacture. It is with 
hand manufacture that we now have to deal. 

The Trades and Gommerce Stage. — Though this stage 
is characterized by the development of trades and commercey 
as the name implies, the real cause of this is manufacture. 
Men learn to weave fabrics and fasliion things in wood, 
metal, etc., and use dead as well as living nature. The re- 
sults of this arc: 

1. Trades. To make anything well requires so much skill 
that a man needs all his time at it. The man who makes 
only one thing makes it better tlian he who makes many 
things. So labor learns to specialize, as we say, and we have 
division of labor or trades, such as blacksmiths, shoemakers, 
weavers, dyers, etc. 

2. Commerce. We have seen that there was little com- 
merce so long as everybody was engaged in one business — 
the raising of animals and grain — because each had nearly 
all the kinds of wealth which any one else had to sell him. 
But, plainly, when men learn trades and each makes only 
one kind of an article, he will neither want all the things he 
makes nor make all the things he wants. He must trade. 



Economic Life of Civilized Man — Fiest Stage. 15 

And so wherever manufacture develops we find trade grow- 
ing up as a necessity. For convenience' sake some men 
spend all their time in exchanging goods which other men 
make, and so save tliem time and trouble. Difterent coun- 
tries have different trades, and merchants find it convenient 
to make exchanges between them. 

3. Money. Plainly, such a general system of exchange 
cannot be carried on by barter. The shoemaker who needs 
bread cannot wait till he finds a baker who needs shoes and 
make a trade with him. Under such a sj^stem everybody 
would be poor for the lack of the things that everybody else 
was anxious to furnish. They would simply fail to make 
necessary exchanges. In order to effect exchanges easily we 
must have some common article for which we can exchange 
everything. This was early felt, and yet it lias proved one 
of the most difficult of all problems to find precisely tlie 
right thing and just enough of it. Many things have been 
tried: near the times of barter, skins, shells, cattle, etc.; 
then iron, copper, bronze, silver, and gold. Silver and gold, 
which still constitute the world's universal money, came 
fully into use during this period, and money becomes in- 
creasingly important. 

4. Cities. We have seen the tendency of those employed 
in agriculture to form small village communities. These 
existed in early times for reasons of protection, coopera- 
tion, and sociability, but they could not become large 
because agriculture required the population to be scat- 
tered. Manufacture requires precisely the opposite. If 
people are to live by trades and exchanging each other's 
goods they must be near together for convenience' sake. So 
cities situated according to the convenience of commerce 
develop wherever men learn to manufacture. Except in case 
of rare combinations of political forces, cities not only do 
not, but they cannot, grow up until men learn to manufac- 
ture ; for if they only knew herding and agriculture the in- 
habitants would perish for lack of emplojnnent where there 
was no land for cultivation or pasture. So, wherever we 



16 Outlines of Economics. 

find the remains of a city, we may conclude that the people 
had learned manufacture and commerce and passed into the 
stage of economic civilization. 

5. The Guild System. New forces introduced into society 
do not take care of themselves. So the trades had to organ- 
ize in order to reduce their business to some kind of order. 
Each trade had its guild, which specified in detail how the 
business should be carried on, how many should be admitted 
to it, and how the trade should be learned. Where, as was 
usual, the guilds controlled the cities their rules were early 
sanctioned by law. 

6. Political Freedom. The agricultural stage had in the 
greater part of Europe culminated in the feudal system. 
The feudal lord occupied a commanding position, like that 
held by the patriarch in an eai-lier state, and he owned the 
land occupied by the tribe, and the tillers of the soil had 
become serfs; that is, while they could not be sold they 
were obliged to stay on their lord's domains and work for 
him lor such pay as he chose to give them or such remunera- 
tion as might be established by custom and public opinion, 
especially as manifested through the Church. The manu- 
facturing cities were the natural rivals of these great feudal 
estates. The lords felt their power threatened and bitterly 
opposed the cities. And so there were wars and alliances 
and treaties until finall}^ the cities conquered, as they were 
bound to do in the end. These cities were free, and serfs 
who fied to them were accepted and made freemen. Thus 
feudalism began to perish, and, slavery and serfdom grad- 
ually disappearing, another step was taken toward liberty and 
humanity by man's progress in learning to get his living. 



Economic Life of Civilized Man — First Stage. 17 



SUMMARY. 

1. Ecotiomic civilization begins with inanufacture, at first by hand. 

2. Tho result is the learniij<^ of trades and the dovelopmeut of exchange 
and commerce. 

3. Money is devised to facilitate exchange, 

4. Trades organize into gnilds, and commerce develops cities which be- 
come free and dfStroy the feudal system after bitter opposition, 

QUESTIONS. 

1. Why does manufacture necessarily lead to commerce? 

2. What is the difference betv^een barter and money exchange? Wliat 
things have been used as money ? Why did people choose such things? 

3. Why could not agriculture alone develop cities? Why do they de- 
vel(jp under manufacture? 

4. What was a guild? What were its purposes? 

5. What produced" the feudal system? Why? Wliat wore its advan- 
tages? Its weakness? What caused its downfall? Why? 

6. What was the effect of manufacture and commerce on slavery and 
serfdom? Why? 

7. Does liberty depend on the absence of restraint? Why? 

LITERATURE. 

Rogers, Thorold : Worl: and Wages. 

Ashley, W. J. : Introducf./'on to Eyiglish Economic Ilutory and T/icory. 

Cunningham, W. : The Grorotli of English Industry and Commerre. 



CHAPTER IV. 

THP] ECONOMIC LIFE OF CIVILIZED MAN— SECOND STAGE. 

We have seen in the preceding stage an immense develop- 
ment of wealth and of those social institutions upon which 
the welfare of men depends. This all results from man's 
learning to make things by distribution of occupations or 
division of labor. But there was one great limitation to this 
progress. Things were still made and moved for the most 
part by mere muscle. Machines were used to some extent, 
but they were almost altogether such as could be run by the 
power of man or some lower animal, as the ox or the horse; 
for with the exception of sailing vessels, windmills, and 
water wheels men knew no other. Invention progressed 
slowly under such circumstances ; but the tools and imple- 
ments already in use were improved, their number gradually 
increased, and wind and water were utilized as Ibrces to a 
gi-eater extent as time went on. When things were made 
they were hauled and transported by horses and mules or 
boats and vessels to their destination. Now, mere muscle is 
an insignificant thing compared with the powers of the uni- 
verse, and man accomplishes relatively little so long as he 
depends upon it. But man has more brains than any other 
creature, and progresses by their use. The next step in 
progress is easy to anticipate. 

The Industrial Stage.— The characteristic of this stage, 
as we have said, is jjoioer nimivfacture. It is hardly neces- 
sary to say that this dates from the invention of the steam 
engine in 1769, Tliough little used at first, it was destined 
soon to accomplish changes such as men still hardly under- 
stand. Up to this stage men had practically what their own 
muscle could produce. Now it is estimated that the power 



Economic Life of Civilized Man — Second Stage. 19 

employed in manufactures produces twelve times as mucli as 
all human labor could produce unaided.* In some manufac- 
tures, as in making steel rails and sawing lumber, the power 
employed is many hundred or even thousand times that of 
the workmen's muscle. This is plainly an advantage. The 
great number of things which we now enjoy must be a mat- 
ter of satisfaction to all who believe in human comfort. 
Yet there appear to have been few periods in human history 
when so many have been dissatisfied. What is the reason 
of all this ? Simply that the change from the old to the 
new way of manufacture has been violent and rapid, and has 
required a reconstruction of the old social order. The old 
system of rights and duties and laws would not apply to the 
new conditions, which soon broke them down and left society 
in a disorder from which we have plainl}^ not yet recovered. 
Men learned with astonishing rapidity how to make new 
things, but they were slower in learning how to use them 
wisely, much slower still in learning how to distribute them 
justly. So manufacturers made more than they could sell, 
and had to stop, throwing workmen out of employment 
until factories started up with another spurt, only to stop 
again with returning "hard times." The multitude of 
hand manufacturers found their business ruined and suifcred 
abject misery before they understood the situation and 
moved to the great cities to become workmen in the facto- 
ries. The process moved on slowly, and one trade after 
another had the same fate. Some are in the process to-day. 
There is always the same reluctance to give up the old busi- 
ness, the same poverty and hardship compelling men to do 
so, and the same feeling of wrong and injustice at the dire 

* Mr. Garnier, in Lalor's Cyclo2}edia, estimates tliat in the production of flour 
the labor of one person is equal to that of one hundred and forty-four per- 
sons in the time of Ulysses. In the iron industry twenty-five times as 
much is now produced with the best inventions as in the Pyrenees with the 
old metliods. In the cotton industry three liundred and twenty times as 
much is produced now per person employed as in 17C9. Transportation by 
railway is ten times easier than on ordinary roads. 



20 Outlines of Economics. 

compulsion. Let us notice some of the contrasts between 
this and the former stage. 

1. Relation Between Classes. Under the system of hand 
manufacture each master in the trade worked by himself or 
with a few others. He employed one or more journeymen 
and apprentices, but as these were simply learners, who in 
time became masters themselves, we may say that men in 
full possession of their trade worked on their own account 
and owned what they made. If prices rose they received the 
benefit of the higher prices; but this was seldom the case, 
for the guilds regulated the number of masters, the number 
of apprentices, and the mode of manufacture. Thus all went 
on evenly, employment was relatively constant, and there 
was in the first part of this period general satisfaction with 
the existing order, although, of course, there were then, as 
there always have been, individual grievances. Strictly 
speaking, there were no class divisions in manufactures, ap- 
prentices and journeymen being simply masters not grown 
up, and living on friendly terms in the master's family as his 
industrial children. This system was not specially favor- 
able to progress, but it was good for social order, which 
is the next best thing. 

But each workman cannot have an engine and machinery. 
They cost more than he can pay, and furnish more power 
than he can use. If the masters had known enough, they 
would, perhaps, have combined, bought machinery, and 
changed their methods; the local guild would have become a 
cooperative factory, and all would have gone well. But they 
did not know enough. Men are generally opposed to change 
and " new-fangled notions." So a few, more enterprising and 
wealthy than the rest, made the experiment to the certain loss 
of the rest. We can hardly expect them to enjoy the process 
or be patient under its operation. They appealed to the guild 
laws, but these were not equal to the emergency. They turned 
mob and broke machines, but the result was only delayed 
a little. With their fortunes wasted and their business 
niinecl, they had nothing else to do than to yield and sullenly 



Economic Life of Civilized Man — Second Stage. 21 

seek places as workmen in the new factory. Before, tliey had 
all been "masters;" now they have a master in a sense 
unknown before. Before, any man with health and sense 
could become a master, and permanent class distinctions did 
not exist among them. Now, in some industries, not one in 
a hundred can by exceptional ability become an independent 
employer, and the workman knows that he is a workman for 
life. So we have now two industrial classes, with a great 
gulf between them which comparatively few men can cross, 
and with interests which seem irreconcilable. It is not too 
much to say that the relation between employer and em- 
plo3^ee has tended to become strained and unfriendly ever 
since it existed on a large scale — that is, for the last hun- 
dred years. 

2. The Wages System. Formerly the workman had what 
he made and sold it for what he could get. This was natu- 
ral under the division of labor, where each man made one 
article and a whole article. But now we have a much greater 
division of labor, or rather a combination of labor; for it 
takes a whole gang of workmen to make a single article. 
When a set of men have finished a case of shoes, and one 
has cut out the soles and another made the heels, etc., how 
many shoes has each man made ? Then, too, the employer 
has furnished the stock and tools, and must be paid. How 
many shoes shall he have ? Some way out of the trouble has 
to be found. The way adopted was the simplest and per- 
haps the best. The employer takes all the shoes and pays 
the workmen stij)ulated wages. This system, which, though 
very old, has onl}^ recently become general, seems natural 
and right to us who know no other, but it must be confessed 
that it has not been entirely satisfactory. One reason is that 
we have discovered no very good way of telling just how 
much wages to pay. Once it was thought that competition 
would settle it, and it is true that employers cannot by any 
means do just as they please; but, after a century's experience, 
there is a widespread feeling that in all these bargains about 
wages the workman is at a disadvantage, and does not get 



22 Outlines of Economics. 

the share which it would be well for him to have. Thus the 
wages system is a source of difficulty. 

3. Competition. Under the guild system prices were reg- 
ulated by custom or law. The man who tried to undersell 
his neighbor would have been considered a mean man and 
been boycotted, or treated even worse. He could compete 
with his neighbor by making better goods, but not much 
was done in this line, quality, like prices, being generally 
fixed by custom or law. But when the factory came it had 
to undersell. Only so could it sell its large output. When 
the competition was once started there was no stopping it. 
Factories competed with each other, and, as one after another 
became hard pressed, a new machine was invented or a new 
process discovered, and progress was continual. It was what 
men needed to develop their enterprise. Machine followed 
machine, cost was lowered, and year after year the buyer 
rejoiced in lower prices. Thinkers of this time were pro- 
foundly impressed by the increase of wealth due to competition 
as well as by the irksomeness of the old guild restrictions, 
which still made awkward and futile efforts to control the 
new movement. And so they concluded that the State 
should not try to guide industry, as it had so long been do- 
ing, but that all that industry needed was to be let alone. 
We shall note later some of the results of the attempt to 
follow this principle. 

4. Banking and Credit. The preceding age developed 
money; this age developed credit. Money is used now 
chiefly in retail trade, and in large transactions has been 
almost displaced by credit and the instruments of credit, as 
checks, drafts, and bills of exchange. A debtor pays his 
creditor by a check on his bank account. The creditor hands 
the check into the bank, and the amount is charged to the 
debtor and credited to the creditor. If the two men have 
accounts in different banks the banks exchange checks and 
pay the difference. In the Kew York Clearing House, 
where all the New York banks exchange checks and bal- 
ance accounts, the whole amount of payments averaged 



Economic Life of Civilized Man — Second Stage. 23 

$113,019,011.01 per clay, not long ago; but the checks so 
nearly offset each other that only 15,403,941.40 remained to 
be paid between the parties, and almost all of this was paid 
in another form of credits, clearing house certificates, and 
almost none in money. That is, of every $100 paid, all but 
$4.78 was paid in checks and only a few cents in money. 
To manage this great business of credit, banks, as we now 
know them, have been created. In 1782 there was but one 
bank in America, now we have 9,367.* 

5. Tfansportation. The moving of things was far less 
important before this period. Not much could be moved 
long distances on land while only pack horses and wagons 
were known. Sailing vessels, although slow, could transport 
even commodities of large bulk between places connected 
by water, and cities were then ports. The invention of the 
locomotive and steamboat has been hardly less important 
than that of the engine itself. We need not dwell on this 
point. Any man who has taken wheat to market in a farm 
wagon over a muddy road, and has seen a railway train 
dash past him on its steel track, has had a glimpse of the 
progress we have made in a hundred years. This ilhis- 
tration, however, calls to mind only one aspect of this prog- 
ress. Another is suggested by the statement that we have 
become relatively, though not wholly, independent of water- 
ways furnished by nature or by art. Cities can now be 
located elsewhere than on the seacoast or navigable rivers. 
The power of man over nature has increased. The percep- 
tion of this fact led to an excessive reaction, and recently, 
in the United States, at least, the importance of waterways 
has been underestimated, to our disadvantage. 

6. Moral and Legal Restraints. We have seen hitherto 
a sharp distinction made between neighbors and strangers. 
The former, in large or small circle, were protected by detailed 

* There were in the United States, October 31, 1892, 3,788 national banks, 
3,191 State banks, 1,161 private banks, 1,059 savings banks, and 168 loan 
and trust companies. The latter, though not performing all the functions 
of banks, may properlj^ be included in our aggregate. 



24: Outlines of Economics. 

laws and customs from the overreaching of one another, and 
of strangers; the latter were exposed to whatever treatment 
might be considered advantageous. A characteristic of the 
industrial stage is that there is no longer any such clearly 
defined distinction. We naturally ask, Have all men become 
brothers, or are they all enemies ? Opinions will differ, but 
few will claim that men in their business dealings are very 
brotherly. Nor did men make any pretense of establishing 
universal brotherhood when the old j)rotective customs and 
laws were repealed. They thought every man could take 
care of himself if he were let alone. The old customs and 
laws were so outgrown, so selfish in their later form, and, 
above all, so utterly inadequate to the new industry that was 
growing up, that all activity of the State w^as distrusted. 
Then, too, the change has been going on so raj^idly and 
constantly that it seemed impossible to devise laws for the 
new society. The result is that this stage has been charac- 
terized, especially at first, by a minimum of law and moral 
sense in economic life. It would be a mistake to suppose 
that men were less moral than formerly, but circumstances 
have turned moral eflTort into other channels and left the 
economic life relatively non-ethical. 

Our history, so far, has been put wholly in general terms 
for convenience' sake, but the industrial stage, being the one 
in which we live and whose problems we have to settle, must 
now be studied more in detail. 



Economic Life of Civilized Man — Second Stage. 25 



SUMMARY. 

1. The invention of the steam engine multiphes human power; revolution- 
ary changes and disorder appear in industrial society. 

2. The reorganization of industry produces widely separated classes be- 
fore unknown, resulting in hostility and resistance to the new order, espe- 
cially to machinery. 

3. The subdivision and dependence of labor develops the wages system. 

4. Custom gives place to competition in the government of prices, and a 
great fall is the result. As a result, competition is urged by many as a suffi- 
cient regulator of economic relations. 

5. Credit now develops, limiting greatly the use of money. Banks are 
organized. 

6. Canals, raiUvays, and steamboats revolutionize transportation. 

1. There is a great diminution of moral and legal restraints in business. 
The economic life of the period, owing to distrust of State interference and 
couttdence in competition, is non-ethical. 

QUESTIONS. 

1. Why has machinery made relations between employers and men un- 
friendly ? Why were they not unfriendly before ? 

2. Why do men dislike machinery? Is their dislike justified? Why? 

3. What is the objection to the wages system ? Why was it not adopted 
sooner? What system went before it ? 

4. Were the former objections to competition reasonable ? Why ? What 
are its advantages? Its disadvantages? How did machinery introduce it? 

5. What is a bank ? What good does it do ? What is the advantage of 
checks and drafts? 

6. How does transportation affect manufacture? 

7. What change of feeling did men experience at this time regarding law 
and custom? Why? Was it for the better? Why? 

LITERATURE. 

Toynbee, Arnold : Tlie Industrial Revolution in England. An admirable 
work of which free use has been made in the preparation of this and the 
following chapters. 

Rand, Benjamin : Selections Illustrating Economic History Since the Seven 
Years' War. 



CHAPTER V. 

THE INDUSTRIAL REVOLUTION IN ENGLAND*— PART L 

The passage from the trades and commerce stage to tlie 
inclustrial stage is generally known in England as the Indus- 
trial Revolution. The name is appropriate. A change that 
takes lAiice gradually, so that life adjusts itself to the new 
conditions easily and no great loss or suffering results, a change 
like that which takes place in the plant which is always grow- 
ing while it seems to be at a standstill — such a change we call 
a development or evolution. But a change that comes so fast 
that life cannot adjust itself to the new conditions, a change 
which breaks down the old order with much confusion and 
suffering — this we call a revolution. In England particularly 
the adoption of the industrial system was one of these vio- 
lent changes last described. To understand it we must first 
notice the condition of things just before it began. 

The Economic Condition of England in 1760. — 
1. Agriculture. We have seen that the cultivation of the soil 
develops the idea of ownership, first by the tribe and later 
by the individual. But the slowness of this process may be 
understood from the fact that in 1*760 immense tracts of land 
were still held as "common" or "waste" land. Seven rail- 
lion acres of such land were made private property between 
1760 and 1838. Upon this common land the laborers built 
their cottages, cultivating little patches of it for themselves, 
and pasturing upon the rest the few geese or sheep Avhich they 
were able to keep. The advantage was that the laborers 

* In the preparation of the following chapters large use has been made of 
Toynbee's Industrial Revolution, but in accordance with a principle adopted 
tliroughont tliis book detailed references have not been introduced into the 
text. 



Industrial Eevolution in England — Pakt I. 2Y 

were somewhat independent, paid no rent, and had a little 
means of support besides their wages. The disadvantage 
was that the land was mostly " waste " in fact, the marshes 
undrained and the partial cultivation very primitive and 
poor. A traveler at this time describes it as "beneath con- 
tempt." Even the private lands were ill cultivated. It is 
not strange that Great Britain, raising all her own food as 
yet, should have had in 1760 little more than one fifth her 
present population. 

2. Manufactures. Here we are especially interested, as 
it was in this department that the great change was to take 
place. The system of hand manufacture was still in general 
operation.* The principal manufacture was woolen goods, 
of which England exported in 1770 about £4,000,000 worth, 
or nearly a third of her entire export trade. The manufac- 
ture was, however, primitive. A writer somewhat before 
this time thus describes it : The land " was divided into 
small inclosures from two acres to six or seven each, seldom 
more; every three or four pieces of land had an house belong- 
ing to them, , . . hardly an house standing out of a speaking 
distance from another. . . . We could see at qm^x^^ house a 
tenter, and on almost every tenter a piece of cloth or kersie 
or shaloon. ... At every considerable house was a manu- 
factory. . . . Every clothier keeps one horse, at least, to carry 
his manufactures to the mai-ket; and everyone generally keeps 
a cow or two or more for his family. By this means the 
small pieces of inclosed land about each house are occupied, for 
they scarce sow corn enough to feed their poultr}^ . . . 
The houses are full of lusty fellows, some at the dye-vat, some 
at the looms, others dressing the cloths ; the women and 
children carding or spinning, being all employed, from the 
youngest to the oldest. . . . I^ot a beggar to be seen nor an 
idle person." This seems a most wretched way to make cloth, 

* The word manufacturer at this time signified a person working with his 
own hands. In 1776, in his Wealtli of Nations, Adam Smith said, "A man 
grows rich by employing a multitude of manufacturers." The use of the 
word as a large employer is of later origin. 

# 



28 Outlines of Economics. 

but we must not forget that the picture has some attractive 
features. The " manufacturer," as the hand worker was then 
properly called, had his home, his cows, and his poultry; he 
bought his own wool, his wife spun it into yarn, and together 
they wove it and sold it at the " fair," enjoying all the pro- 
ceeds. These proceeds were not, could not be, very great, and 
he never became rich, but he enjoyed independence and rude 
comfort. It is much to say in favor of any system that it 
produces general independence and comfort, but " not a 
beggar or idle person." Before the age of which we write, 
however, this had somewhat changed. Cities began to at- 
tract " manufacturers " according to the inevitable law we 
have mentioned. The inevitable tendency to divide the 
process aj)peared ; manufacturers found it difficult to buy wool 
and spin it along with the weaving process. So the proc- 
esses were divided and a middleman appeared who bought 
yarn from the spinners and sold it to the weavers. Then he 
ceased to sell the yarn, but advanced it, keeping a claim on 
the cloth and paying a certain sum for the weaving. Thus 
the "manufacturer" became a loorkman, a wage-earner, and 
a dependent upon the capitalist who furnished the stock. 
The germs of the factory system thus existed in 1760, 
though as yet the work was generally done by hand. 

The iron industry was next in importance, but England in 
1737 imported perhaps 20,000 tons of iron, or more than 
she produced, while in 1881 she exported 3,820,315 tons. 
The iron manufacture was evidently waiting for the powder 
blast furnace. The cotton manufacture, destined later to 
eclipse almost all others, was scarcely begun. 

3. Transportation. This was exceedingly backward. The 
roads are described by a traveler as "most execrably vile," 
which would seem a reasonable epithet when he tells us that 
he found ruts four feet deep and " saw three carts break 
down in a mile of road." Such was their condition that 
pack horses were still the common means of transporting 
goods to and from market. Nothing so greatly impeded the 
development of manufactures as the difficulty of moving 



Industrial Kevolution in England — Part I. 29 

about and taking wares to any but neighboring markets. 
The only improvement in this line up to 1760 was the build- 
ing of a few canals, which were a great help as far as they 
went; but this was not very far. 

4. Economic Legislation. This to us will seem strangest of 
all. The mediaeval notion of government was still nominally 
in force. This notion was in general that detailed and 
special legislation was required in many places where we 
now consider general laws preferable. So the State passed 
many laws to regulate religion, agriculture, manufactures, 
and commerce. Some of these laws we must notice. We 
have seen that men did not believe in competition. They 
dreaded the mischief which a stranger might work, coming 
into a town and carrying on a trade in an irregular fashion. 
So, by the law of settlement no man could carry on a trade 
in a city unless he was a citizen of that city and a member of 
the trade guild in that place.* By another law he could not 
get this right unless he served seven years as an apprentice 
at the trade, and in a manner prescribed in much detail. 
Further still, there were regulations as to the number of 
apprentices, so that in any case he might be refused. The 
purpose of such regulations was to protect the trade from 
overcrowding and irregular methods, and from the result- 
ing disorder and confusion. Another law required inspec- 
tion by government officials, because it was thought that 
society must be protected from adulteration and all kinds of 
cheating by dishonest manufacturers and dealers, it being 
taken for granted that buyers did not know enough to tell 
honest goods from shams. Of course this was so. Even 

* The law of settlements aimed also to make eacli parish support its own 
poor, and a workman coming into a new town had to give evidence or 
surety that lie would not become dependent on the poor rates. As few 
could furnish adequate guarantees, this was so serious an obstacle to free- 
dom of movement tliat Adam Smith said there was in his day scarcely a 
" poor man in England of fortj^-seven years of age, . . . who had not in 
some part of his liCe felt himself most cruelly oppressed by this ill-con- 
trived law of settlements.'' 



BO Outlines of Economics. 

to-day how many can tell pure baking powder, or all-wool 
goods, from those that are not ? 

But perhaps the most striking of all was the law which 
left it to justices of the peace to fix the wages of workmen. 
It was often held that workmen would be oppressed if left to 
the mercy of employers ; but the real purpose of the laAV 
seems to have been the protection of the employer against 
high wages, and the spirit of the administration of the law 
appears to have conformed to this purpose. Laws regulating 
wages were passed after the plague, or " Black Death," had 
in the fourteenth century carried off a large part of the 
working population of England ; and the avowed aim of this 
legislation was then to prevent the wage-earner from taking 
full advantage of the scarcity of labor. Inasmuch as they 
were held to be thus protected by law in their wages, combi- 
nations among workmen were considered unnecessary and 
dangerous and were strictly forbidden. 

We cannot mention the many other laws governing foreign 
commerce and other lines of business, still less those that 
governed religion, politics, and other departments of life. 
What the experience of the eighteenth century proved in 
England was not that the State should not regulate the 
economic life of its citizens, but that it was then regulating 
it in an antiquated and injurious way. 

The careful observer will notice that — in spite of laws 
which, when enumerated, seem to cover all the affairs of life 
— many subjects of legislation, now regarded as of prime 
importance, were then neglected. Police protection was 
inadequate, the fire department, as we know it, was not 
organized, education was not fostered, and sanitary laws 
were few in number, and there was then no great branch of 
the public service engaged in the administration of such 
laws. This brings us to the last point of this chapter. 

. 5. The Condition of Thought in 1760. Here, especially, 
we shall fail to understand the industrial revolution if we 
look only at the economic life. A tremendous revolt had 
begun against the whole system of government we have 



Industrial Devolution in England — Part I. 31 

described and in favor of liberty. But it would be a great 
mistake to suppose that this revolt, which carried, eventually, 
everything before it, sliowed itself only in the field of 
industry. The restrictions which were most objected to 
were those upon conscience and religion. This was the real 
animus of the revolution under Cromwell a century before; 
but it must not be supposed that the most of the Puritans 
desired this liberty for others as well as for themselves. 
Next to religious liberty political liberty was the desire of 
Englishmen, and this had been a prominent issue in the rev- 
olution under Cromwell. While restrictions upon trade 
were contentedly accepted the passion for personal liberty 
worked itself up to a fanaticism. Rousseau stormed against 
the artificiality of society and sumraone<l men to free them- 
selves from its restraints and return to nature, winning the 
sympathy of Thomas Jefferson, who was j^rofoundly influ- 
enced by French thought. In a universal struggle for free- 
dom economic life could not be left out. Tlie same year that 
Thomas Jefferson wrote the Declaration of Independence, 
asserting that all men are by nature free and equal, Adam 
Smith, formerly a professor in Glasgow University, pub- 
lished The Wealth of Nations, the most influential book ever 
written on economics. We can notice here only the central 
idea of his remarkable book. It is the same as that of 
Jefferson, only applied to economic rather than to political 
life. Men are by nature free and equal ; the law should not 
establish artificial inequalities among them. What men need 
in business is not protection but liberty. Under free com- 
petition each man seeks his own interest, and in seeking his 
own interest promotes, as a rule, the best interests of society.* 
Such was the temper of the time, so universal the impa- 
tience with restraint, even the most wholesome, and so mis- 
chievous much of the existino; economic leejislation, that the 

* The exceptions to the rule, which the careful reader of Adam Smith 
discovers, are more important than generally supposed ; yet the chief empha- 
sis was laid on the rule and not tlie exceptions, and the impression which 
the book produced was in favor of the abolition of legal restrictions. 



32 Outlines of Economics. 

book was soon elevated to the rank of a gospel of economics, 
and, followed by works equally great, it inspired the eco- 
nomic policy of the next century. We shall see the results 
of this policy in the next chapter. It is sufficient now to say 
a word about its central principle. If we consider this as an 
expression of the passionate yearning of an age, namely, that 
all men should he free and equal, it is worthy of our highest 
honor. But if we consider it as a sober judgment it is open 
to an objection which to-day a schoolboy can see ; men may 
be made free and equal before the law, but by nature all men 
are not free and equal. 



Industrial Kevolution in England — Part I. 38 



SUMMARY. 

1. The passage to the industrial stage was sufficiently violent in England 
to be called a revolution. 

2. England in 1760 had a poor agriculture, with much land held in com- 
mon. 

3. Manufactures were divided, largely rural and inefficient, but steady 
and prosperous in their way. 

4. Transportation was backward, roads being exceed ingl}' bad. 

5. Economic legislation was detailed and special, adapted to former con- 
ditions, but hindering industrial progress. 

6. The public mind was in strong revolt against former restrictions, re- 
Mgious, political, and economic. 

7. Adam Smith's Wealth of Nations asserts the doctrine of economic lib- 
erty. The motto of the age is, ''All men are b}^ nature free and equal." 

QUESTIONS. 

1. What is the difference between an evolution and a revolution? Which 
is best? Why? 

2. What wore the advantages of waste or connnon lands? The disad- 
vantages? Wiio gained most by change to private ownership? 

3. Why was 'he old manufacture of cloth inefficient? Why were manu- 
facturers prosperous? Who suffered most by the old system? 

4. What was the general character of legislation in this period ? How 
different from that of our day? What old laws have we abandoned? What 
new ones have v/e added ? Why ? 

5. What was the trend of thought at that time ? Where did it first ap- 
pear? What countries did it affect? Who applied it to economics? Why 
did he oppose labor legislation? 

6. Are men free and equal in any sense ? In what sense free and equal ? 
In what sense not? What are the inequalities which exist among men? 
To what are they duo? 

LITERATURE. 

Taylor, E. Yf . C. : Introduction to a History of the Factory System. 

Wright, Carroll D. : The Factory System in the United States. Yol. II, 
Tenth Census Eeports. Eeviews English and Continental experience as 
well as that of America. 

Ashley, W. J. : Faj-Jy History of the Fnglish Woolen Industry. American 
Economic Association Publications. Yol. II, No. 4. 



CHAPTER VI. 

THE INDUSTRIAL REVOLUTION IN ENGLAND— PART IL 

Haifa Century of a Passive Policy of Government 
in England. — It is hard to be fair in drawing conclusions 
from history. The things that happen are due to so many 
causes that it is difficult to tell how much any one cause has 
to do with them. This is especially true of the period of 
English history with which we now have to do. In addition 
to the new methods in manufacture there were wars, peculiar 
facts about land-ownership, duties and taxes, and other 
things of great influence on the economic life of the period. 
It is hard to tell, therefore, how much machinery and the 
new economic policy had to do with it. But that they had 
much to do with it everybody admits. We must get as clear 
an idea as we can of what this influence was. 

1. Changes in Legislation. We have seen that Adam 
Smith argued for liberty. He asserted that every man, if 
allowed to do as he pleased, would sooner or later do that for 
which he was best fitted, and would consequently work where 
he could get the most wages. Every man would buy what 
suited him best, and, after some experiment, manufacturers 
would make what was called for. If one business was making 
more money than the rest more men would go into it, and by 
tlieir competition would bring prices down. If men cheated 
their customers, the customers would go somewhere else, and 
cheating would not pay. And so on indefinitely. Everywhere 
men would look out for their own interests, would make the 
bargain that Avas most advantageous to themselves. This 
system of balanced self-interest resulting from competition 
was the best regulator possible, infinitely better, he claimed, 
than the old-time laws, which only encumbered the devel- 



Industrial Revolution in England — Part II. 35 

opment of industry. If the policy of industrial freedom 
were adopted, be prophesied a great increase in the national 
production of wealth. 

This system was adopted. Not that a wholesale repeal 
of the old laws occurred — such things never happen in Eng- 
land and are difficult anywhere — but there is a quiet and 
eifective way of changing laws by simply changing men's 
ideas regarding them and leaving them unenforced. A law 
tliat lias been long observed has often to be long dead before 
|)e()ple gain the courage to repeal it. So the law requiring 
seven years' apprenticeship before one could enter certain 
trades quietly died during the eighteenth century, and when, 
tiually, in tbe labor troubles early in this century, some 
workmen in desperation discovered the old law and prose- 
cuted employers for violating it the law was first suspended 
and then repealed, as being plainly ill adapted to the new 
condition of industry. So, little by little, the old laws were 
repealed or forgotten, and men were left free to bargain and 
manufacture as they pleased. 

One reason that these laws were the more easily set aside 
was that they never had been really intended to protect trade 
1)1 general and secure the economic welfare of all. In the 
legislation of the Middle Ages social and political considera- 
tions were always mingled with economic questions. The 
restrictions placed upon trade were not in the interest of 
trade, but in the interest of a few people engaged in that 
particular trade. Thus the very influential dealers in woolen 
goods, alarmed at the introduction of cotton, had secured a 
law placing a heavy tax on cotton goods, lest these, by their 
(•heaj)ness, should injure the woolen trade. Other trades did 
the same, till finally there was a network of burdensome 
restrictions under which all sujffered. Laws regulating 
labor at that time were not so much to help workmen as to 
check their growing power and aspirations.* 

* Adam Smith, in declaiming against laws regulating labor, had in mind 
laws aimed against labor, and not laws like those of modern times designed to 
'7enefit labor. He said in iwq place in his Wealth of Ncitiom that if any law 



36 Outlines of Economics. 

A striking instance of the unfairness of the old laws is 
seen in the law against labor combinations. Although cap- 
italists had been allowed to combine from the first, workmen 
were forbidden to do so under severe penalty. Even after 
the laws of apprenticeship, regulation of wages, inspection 
of goods, and many others had been repealed this law was 
retained, and men who attempted to form unions were se- 
verely punished. This was due to the slow recognition of 
the workman's rights, and also to the curious fact that even 
the believers in the new gospel were opposed to labor unions, 
believing that competition among workmen would secure 
their proper wages and their best rights. Eventually this 
law also was repealed. 

2. Changes in Manufacture. In 1769, the year that Na- 
poleon and Wellington were born, James Watt invented the 
steam engine. It is an interesting fact that Watt was a 
friend of Adam Smith ; and when the city of Glasgow re- 
fused to let him work at his trade because he was not a 
member of the guild at that place, Adam Smith allowed him 
to set up a shop on the university grounds outside the city's 
jurisdiction, and thus the two great forces that created the 
revolution were born close together. The same year that the 
steam engine was invented began a series of inventions 
which, during the next fifty years, completely revolutionized 
tlie manufacture of cotton. The earlier of these inventions 
affected only the spinning of cotton, and, while hand spin- 
ning immediately ceased, hand weavers were kept busier 
than ever. The improvement in goods and lower prices 
immensely increased the demand, while weavers were paid 
not less, but rather more, than before. Finally, however, the 
power loom was introduced, and then there was a change. 
The immense number of hand weavers thrown out of work 
could not find employment in tending the new looms, nor 
could they immediately secure another occupation. The 

chanced to be beneficial to labor it was sure to be a Just law. "Writers of 
our daj^ who protest against labor legislation are opposing laws of a differ- 
ent kind from those which aroused the ire of Adam Smith and his friends. 



Industrial Revolution in England — Pakt II. 37 

number of power looms was at first much smaller, and the 
machinery was so nearly self-acting that one person easily 
tended four looms. Moreover, as the woi'k required deftness 
rather than strength, women and children Avere employed in- 
stead of men, because they could be hired cheaper. The 
distress among the unemployed workmen was very great. 
Forbidden to combine openly, they did so secretly in dark 
conspiracies to wreak vengeance on their enemies, as they 
gradually conceived the class of employers to be, and espe- 
cially upon the machinery, which they considered the par- 
ticular cause of their misfortunes. This was a perfectly 
natural result of free competition, allowing every man to do 
as he pleased, at a time when invention was necessitating 
rapid changes in the economic life of society. Laws were 
passed against the rioters, punishing machine breakers with 
death. This did nothing to cure the misery of the land, but 
was a strong argument to men to endure it. It took Par- 
liament a long time to learn that it could interfere in a way 
to lessen the suffering of the peoj^le. 

The great battle of the industrial revolution was fought 
out in the manufactMre of cotton, an industry which has held 
one of the first places in English economic life. But the 
same experience, in greater or less degree, was repeated in 
the manufacture of woolen, linen, and silk goods. The en- 
gine applied to the manufacture of iron furnished the blast 
furnace, and the industry was revolutionized. Here, however, 
the change was principally one of simple increase, and did 
not cause suffering ; or, rather, if there was suffering it was 
transferred to other countries, for England had imported a 
large part of her iron, and now she made all her own and ex- 
ported to these same countries and others. This relation of 
England to foreign countries, which were slower to adopt 
machinery, did much to lessen the suffering of English workmen 
by deranging the industries of foreign countries rather than 
her own. To estimate in human suffering the cost of this revo- 
lution we should, therefore, have to consider much more than 

the suffering of Englishmen; but that is enough to appall us. 
4 



38 Outlines of Economics. 

3. Transportation, We have seen that the building of 
canals had begun before 1760. This received a decided 
stimulus from the growth of manufactures and trade at this 
period. The invention of a new kind of turnpike by Mac- 
adam greatly improved the roads at this period, and led to 
the construction of those magnificent highways which are 
now the wonder and admiration of the American traveler. 
In 1830 the first railway was opened, and was soon followed 
by that vast network of railways which now covers the Brit- 
ish kingdom. We must not for a moment suppose that this 
was an undesirable change. Such a development of commu- 
nication is of immense advantage to all human interests, just 
as is the introduction of machinery and the perfection of man- 
ufacturing processes. But, in considering these advantages, 
we must not forget that these changes were revolutionary. 
We have seen how the hand industries were scattered over 
the country, largely to suit people's convenience who found 
it difiicult to bring things from a distance. But as it be- 
came easy to bring things from a distance the balance of 
convenience turned in favor of concentrating manufactures 
in certain places where they could be carried on to special 
advantage and then distributing the goods over the country. 
Thus not only were the country artisans driven out of busi- 
ness, but certain towns were sacrificed to other towns more 
favorably situated. It could not be expected that people 
would understand this and adapt themselves to it. People 
are slow to believe that things are not going on as they al- 
ways have done, and so they stick to the old stand or the 
old way till hunger and desperation compel them to change. 

4. Fluctuations in Trade. One great advantage of the 
old slow-going system of manufacture and trade was its 
regularity. One year was like another, and men's incomes 
from their work were generally much the same. This* was 
diae, not to any peculiarity in the method of manufacture, 
but to the fact that it was settled and men knew what to ex- 
pect. Moreover, it dealt mostly with necessities, which are 
less subject to caprice than luxuries are. But the introduc- 



Industrial Revolution in England — Part II. 39 

tion of macliineiy both increased the amount and changed 
the quality of manufactured goods ; and the improvement 
in the means of communication and transportation finally 
substituted a world -market for the earlier local markets. 
Now, while men can learn to consume almost any amount of 
goods, and that in endless variety, they learn to do so grad- 
ually, because habits are hard to change, sometimes even in 
the direction of greater indulgence. Moreover, the nature of 
our industrial organization is such that it is difficult to re- 
arrange social relations which have been disturbed, and the 
readjustment requires time. Manufacturers had little to help 
them to decide what and how much to make, especially as the 
area of their markets increased. If they were careful and 
increased their output cautiously the demand outran their 
supply, and high prices encouraged them to extend their 
business. More workmen were called for, wages were good, 
and the workmen became accustomed to living well. But 
now they had gone too far ; goods did not sell, or fell greatly 
in price; they had to shut down and wait for better prices, 
or perhaps failed altogether. And for the wage-earners the 
years of plenty were succeeded by years of famine. It has 
been noticed that these fluctuations have occurred ever since 
manufacture was carried on on a large scale. It is due to 
the fact that manufacture is carried on with reference to a 
changing and enlarging demand which it cannot calculate, 
and also that manufacture itself is constantly disturbed by 
improvements which cannot be foreseen. The large scale of 
manufacture itself may not be responsible for the fluctua- 
tions except in so far as it is itself responsible for the facts 
just mentioned. A still larger scale of manufacture hereafter 
may perhaps bring steadiness in industry. But, whatever the 
cause of these fluctuations, the eflect upon the wage-earner is 
demoralizing. If he were wise enough to save his earnings 
during good times, and so have something for hard times, he 
would not sufler so much. But very few people who live in 
abundance can do this ; how much less those whose con- 
dition even in good times is one of meager comfort ! 



40 OuiLiNEs OF Economics. 

5. Pauperism. We remember the statement of the trav- 
eler who in 1760 found among the country weavers "not a 
beggar or idle person." Looking at the country as a whole, 
we should say tliat it was poor, that is, the total wealth was 
small ; but it was so distributed that thert was general com- 
fort. The revolution changed this condition of things. 
Adam Smith urged that free competition would greatly 
increase the production of wealth. Whether this was true 
or not it is certain that free competition a7id machinery 
together did increase the production of wealth immensely. 
There is reason to believe that this was due in a con- 
siderable degree to competition, but it was undoubtedly 
largely due to machinery. Turning, however, from the i^ro- 
daetion of wealth to its distribution, we find that competition 
had an immense influence, an influence in part disastrous. 
While wealth increased at a hitherto unheard-of rate pov- 
erty increased nearly or quite as fast. In 1760 the amount 
spent in poor relief was £1,250,000, while in 1818, after 
an immense increase in national wealth production, it was 
£7,870,000. While the population had increased seventy 
per cent the cost of poor relief had increased five hundred 
and thirty per cent. Here more than anywhere else fairness 
compels us to consider other things than the changes of 
economic conditions. War had something to do with this 
increase; both the appropriation of waste or common land 
and the continuance of unwise legislation, made largely with 
a view to the interests of others than the paupers, contrib- 
uted to this result. But industrial changes, likewise, had 
much to do with it. One of the best of modern writers says, 
in speaking of Adam Smith and the impending revolution : 
" There were dark patches even in his age, but we now ap- 
proach a darker period, a period as disastrous and terrible as 
any through which a nation ever passed ; disastrous and 
terrible because side by side with a great increase of wealth 
was seen an enormous increase of pauperism, and production 
on a vast scale led to a rapid alienation of classes and to 
the degradation of a large body of producers." 



Industrial Revolution in England — Part II. 41 

SUMMARY. 

1. There is a general 'decrease in the legal restrictions of industrial liberty 
in England at the beginning of the century. 

2. These restrictions had been in the interest of special classes, and had 
been more and more ignored during the preceding century. 

3. The invention of the steam engine, followed by that of the spinning 
jenny, the power loom, and other machinery, revolutionizes the manufacture 
of cotton and establishes the factory system. This soon follows in other 
manufactures. 

4. Distress results to workmen ; men give place in a degree to women and 
children; rioting and unsuccessful efforts at legal repression follow. 

5. New turnpikes and canals, and, later, railways, revolutionize transpor- 
tation, with further disarrangement of industry. 

6. The great expansion of trade produces fluctuations of prosperity and 
adversity, greaily enhancing the sufferings of the working population. 

v. There was an immense increase of pauperism during this period. 
8. Adam Smith's prophecy that unrestricted competition would increase 
production was fulfilled ; but it resulted in an unfortunate and disastrous 

distribution. 

QUESTIONS. 

1. How and why were the mediaeval restrictive laws abandoned ? Why 
did Adam Smith object to them? 

2. Why did the invention of the steam engine necessitate the factory sys- 
tem? How did this system differ from the preceding? 

3. What was the result of the earlier inventions on workmen ? Of the 
later inventions? What influence on the amount of goods? On their qual- 
ity ? Their price ? 

4. Do the workmen profit by this? Why? Does society profit? Why? 

5. Why do wage-earners often oppose machines ? Is there any ground for 
their feeling? 

6. How did railways tend to consolidate industry? Is this consolidation 
the same as that produced by machinery? 

^. Wliat caused fluctuations in trade under the new system ? Are fluc- 
tuations inevitable under the modern system ? Why ? 

8. Are uneven wages as good for wage-earners as even wages, if the aver- 
age is as high? If so, why? If not, why not? 

9. Why were women and children now employed? What are the ob- 
jections to this ? The advantages ? 

10. How was increased pauperism possible with increased national 
wealth? What is wrong when this is the case? 

LITERATURE. 

See references to preceding chapter ; also : 

Rand, Benjamin; Economic History Since 1163. Chapters II, Y, and IX. 



CHAPTER VII. 

THE INDUSTRIAL REYOLUTION IN ENGLAND— PART III 

The Reaction Against the Passive Policy of Gov- 
ernment. — In a truly progressive country all reactions 
against nominal freedom are new efforts in favor of real 
liberty; reactions against false liberty in favor of true liberty. 
What is false liberty ? Simply permission to do as you like. 
This would in some respects be an admirable thing for adults 
of full normal develo23ment if it were not that other people, 
enjoying the same permission, are sure to do things that you 
do not like, and thus frequently make it quite impossible to 
do even halfway as you would like. If men's interests did 
not clash it would be different ; but as it is, the general per- 
mission to do as one pleases results in liberty for the strong 
and slavery for the weak ; or, more truly, since the strong are 
themselves dependent ultimately upon the weak, it results in 
more or less of slavery for all. 

True liberty is not simply the pe7'missio?i but the power to 
act freely. We are truly free in our external relations just 
so far as we have real scope for unhindered action and 
normal development of all faculties.* 

It is plain that if people's tracks cross each other they 
must occasionally step aside for each other, or get in each 
other's way, in which case the weaker suffers first and worst. 
Of course the best possible basis of freedom is to have every- 

*Tlus is only a single phase of this important subject. Its complete dis- 
cussion would require a book. Wise laws, weU executed, increase real 
freedom, although they appear to be restraints. Life in the family and in 
society seems to impose restrictions, yet actually increases real freedom. 
External restraint at times acts upon character and frees the mind from 
evil, thus increasing real freedom. This is a true object of punishment in 
the family and in the State. 



Industrial Eevolution in England — Pakt III. 43 

body disposed not to molest, but to assist everybody else at 
every contact ; but men are not yet so disposed. There- 
fore the law is appealed to to supply the lack of individual 
wisdom and benevolence. When all men have learned to do 
spontaneously that which a just law commands the law has 
done its work, in so far as this is merely repressive, and it is no 
longer needed; but until then it is needed. Never is law so 
much needed as when the conditions of life are changing and 
are imposing upon men new duties which many of them do 
not see or own. It must be confessed that it is hard to make 
wise laws at such a time, but even tolerable laws are better 
than none. Moreover, it may be remarked in passing that 
while repressive laws may disappear as men improve in dis- 
position, laws of positive constructive nature, designed to 
furnish norms for guidance and rules for cooperative effort, 
will surely increase in number and in importance. 

We have seen that laws regulating industry were generally 
repealed during the period we have been considering, and 
that, despite the commotion produced by the revolution, 
little attempt was made to replace them. Up to that time 
the State had, on the whole, increased its regulation of eco- 
nomic life from age to age; but now there was a sudden 
halt. This was partly due to the feeling that men had really 
matured enough so that when they came in contact with 
each other they would respect each other's rights at least 
more than before; but this feeling had not much to do with 
the change. The real cause of the movement was Adam 
Smith's central doctrine that not benevolence but self-inter- 
est would regulate men's relations for the general good. It 
is hardly too much to say that this theory, which has domi- 
nated business for a century, implied, if it did not assert, 
that in the economic world there was little need of a moral 
law. We have now to consider some of the points in which 
this theory broke down in practice and men reacted against it. 

1. The Qualiti/ of Goods. In repealing the laws for the 
inspection of wares it was urged that cheating would not 
pay, and so would cure itself. It is strange that, though the 



44: Outlines of Economics. 

principle of " honesty is the best policy " had been known 
for centuries, men had not become honest. But so strong 
was the new doctrine of self-interest that men urged that the 
very inspection of wares by the government was the cause of 
fraud ; for, the government brand being often put on care- 
lessly, men bought poor goods, because of the brand, which 
they would have rejected if they had examined them. The 
abolition of the laws would result in each examining goods 
for himself, it was claimed. It is hardly necessary to say 
that these hopes were not realized. Nor is the reason hard 
to see. Men might be trusted to attend to their own inter- 
ests if they knew enough to do so, but they do not. .Who 
can tell the quality of baking powder, or ground spices, or 
patent medicines, or many other things subject to constant 
adulteration ? Who can tell whether well water has fever 
germs or pork contains trichinae ? For these the ordinary 
buyer's knowledge is worthless; an expert must be employed. 
Such has been the experience of the English people, and the 
law now provides for the inspection by government experts 
of meat and fish, groceries, drugs, butter, and other articles 
of food. Of course most articles in which differences of 
quality do not endanger the public health are left to private 
management, but not all, as for instance, butter in Ireland and 
herring in Scotland, where the government test is used for con- 
venience. Gold and silver plate are tested, gun barrels, steam 
boilers, drains and sewers, gas, weights and measures, all 
on the same general principle that the government, through 
its expert, must guard people from those serious dangers 
against which they cannot, or habitually do not, protect 
themselves. In reality men do protect themselves through 
government, which represents cooperative effort. They select 
certain persons to act for them as their agents, and what 
one does through an agent one does one's self. For every 
person to attempt to do everything directly for himself 
would mean return to barbarism. Division of labor and co- 
operation are a law of civilization. 

The theory that men will ruin their business if they cheat, 



Industrial Kevolution in England — Part III. 45 

and so will be deterred from cheating, has been utterly 
exploded by this great English experiment. It may be true 
of those long-established concerns whose reputation is a large 
part of their capital in business; but many a man has per- 
petrated an audacious fraud upon a country for a few years 
and retired with a fortune when his cheating began to be 
known. The inspection of goods by tlie State is a principle 
now fully recognized, the only question being how far it 
should be applied. 

2. Tlie Protection of Labor. ISTo where was freedom more 
absolutely demanded than for labor, and nowhere was it 
more needed. The old restrictions were very galling and 
burdensome. But what of the new freedom ? The introduc- 
tion of machinery made it possible to employ women and 
children, as has been said, where men had been needed before. 
But modern machinery is as destructive as cannon if human 
life comes in its way; and the destruction of life and limb 
was appalling. It had been argued that employers would 
find it to their interest to protect their employees from injury 
of every kind, but, however that may be, they failed to-do 
it. So scandalous was their neglect that the law had to 
require by heavy penalties what the simplest dictates of 
humanity ought to have secured. The employment of 
young children of four and five years of age, the bad venti- 
lation of factories, working overhours, neglect of education 
of children, and many other things called for a like interfer- 
ence. It would be difficult to mention a point in which 
employers could have neglected the interests of their em- 
ployees where they did not do so. And here it must be 
noted that free competition fastened upon industry the very 
evil it promised to prevent. Many employers were humane 
in intention, but if they went to any expense to help their 
employees their less scrupulous competitors too often under- 
sold them and drove them out of the trade. Thus competi- 
tion not only did not recognize, but it did not tolerate, the law 
of benevolence. 

The result of this was a series of acts of Parliament known 



46 Outlines of Economics. 

as the Factory Acts, beginning in 1802 and culminating in 
the Consolidation Act of 1878,* which Mr. Jevons, one of 
the most distinguished of English economists, calls *' one of 
the brightest achievements of legislation in this or any other 
country." He well adds: "The great fact is that it embod- 
ies disinterested legislation; the health and welfare of the 
people at large form its sole object; no one class or trade is 
to be promoted, as in almost all the older industrial laws." 
Tliis remarkable act — "the mere table of contents filling 
eight pages and the text sixty-five " — cannot be thoroughly 
stated in a few words. In general it establishes: (1) the 
fencing in of all dangerous machinery; (2) ventilation and 
other sanitary conditions in factories; (3) a working day 
for women and children of not over ten or ten and one half 
hours; (4) a Saturday half holiday; (5) prohibition of employ- 
ment of children under ten years of age, and under sixteen 
years of age unless furnished with a certificate of fitness; 
(6) schooling for children half of each day or on alternate 
days ; (7) government inspectors to supervise and enforce 
the law. This last provision is a necessity without which 
the law would be a dead letter. In contrast with this law, 
limiting the work of women and children to not onore than 
ten and one half hours per day (ten in cotton factories and 
the like), let us notice the old law of apprenticeshij) by which 
a boy must work at least from five o'clock in the morning 
until between seven and eight o'clock at night, with time off 
for meals, and which punished him with imprisonment if he 
refused. Is it not plain that the old act was in the interest 
of employers rather than in the interest of the people ? 

Extensions of the law and improvements in administration 
have taken place from time to time, but the first radical in- 
novation seems to have occurred in 1891. By the act of 1891 

* Improvements have since been made in English factory legislation, but 
the Act of 1878 is properly designated as the culmination, as it may almost 
be called a code of factory law, and contained in itself the more important 
provisions, and also the germs of what was to follow. It marks an epoch in 
the history of the wage.-earner. 



Industrial Revolution in England — Part III. 47 

the age at which children could be employed was raised to 
eleven years. The powers of inspectors were increased, 
greater sanitary precautions and iire escapes were required, 
and certain kinds of heavy labor prohibited for women. But 
the most important feature of this act is an attempt to regu- 
late work done in homes. Employers are compelled to keep 
a register of those to whom they give out work, and by this 
means the inspector is enabled to inspect the places where 
such work is done. This attempt to deal with a most 
grievous evil is distinctly a new departure, and its results 
will be watched with interest. 

Although the beneficence of these laws is now everywhere 
admitted, they were bitterly opposed in their earlier forms by 
most of the economists of the Adam Smith school in Parlia- 
ment, w^io claimed that it would injure the interests of the 
loorhmen. Of course employers predicted ruin. Neither 
proved to be right. It is to be noted that, except in its 
general provisions, the law does not protect grown men, but 
only three classes, namely, (1) women, (2) children, (8) young 
persons — young persons meaning those under eighteen years 
of age. Furthermore, being only a factory act, it does not 
extend to agricultural laborers, a sadly neglected class in 
England, for whose amelioration interest has been generally 
awakened only in recent years. The interests of the great 
landowners, who were strongly represented in Parliament, 
have apparently prevented action in their behalf. 

3. Trades Unions. We have noticed the guilds, which 
played a large part in the history of the Middle Ages. These, 
however, were not like modern trades unions. They were 
unions of men who worked, but not exclusively of w^age- 
earners, nor in the interests of wage-earners even chiefly. 
They w^ere formed of masters. As we have said, however, 
the modern division into employers and employees scarcely 
existed. With the development of the wage system, however, 
there grew up a most natural tendency on the part of wage- 
earners to combine into unions for protection against what 
seemed to them the rapacity of their employers. So jealous 



48 Outlines of Economics. 

had tlie ruling classes been of the lower classes, who outnum- 
bered them, and might thus endanger their power, that laws 
against such combinations had been passed at intervals ever 
since 1304. When these classes found the need of union 
increasing they were driven to organize clandestinely, and 
adopted secret violence in lieu of the open methods which were 
denied them. In 1800 Parliament, finding that unions were 
steadily increasing, passed a most comprehensive law to sup- 
press them, declaring illegal " all agreements between journey- 
men and workmen for obtaining advances of wages, reductions 
of hours of labor, or any other changes in the conditions of 
work." Under this law many workmen were prosecuted and 
severely punished, but in vain. The law became so odious that 
employers were led to pledge themselves to their workmen not 
to appeal to the law. In 1824 Parliament confessed the law 
a mistake and repealed previous laws relating to combina- 
tions of workmen. Trades unions, thus tolerated, grew at 
an astonishing rate, but they were still subject to legal perse- 
cution of one sort and another. Judicial decisions, especially, 
were adverse to them. Their efforts were condemned as 
conspiracies "in restraint of trade;" but in 1875 a law was 
passed which declared that the purposes and actions of trades 
unions were not to be deemed unlawful merely because they 
were " in restraint of trade ; " also that acts which were lawful 
if done by one should still be lawful if done by two or more 
in furtherance of trade disputes. No provision was made 
until about this time for the protection of the property of 
trades unions, and treasurers and others could steal from 
them with impunity. This protection to their property was 
at last afforded. They gradually became a powerful factor 
in English economic life. Whether they have raised wages 
or not is disputed, it being claimed by the older economists 
that wages are governed by laws that no direct ]3ressure can 
modify. The view of most economists of the present day, 
however, seems to be that trades unions find limits to their 
power to raise wages in general conditions which, merely as 
trades unions, they have not created and cannot change, but 



Industrial Revolution in England — Pakt III. 49 

that within these limits their power is considerable ; in other 
words, well-managed trades unions enable wage-earners to 
avail themselves of favorable circumstances which other- 
wise might pass unutilized by them. It may be added that 
few persons, after careful investigation, would be found to 
deny their beneficial eflect on the education and discipline 
of the laboring classes. 

Trades unions have attained their highest development in 
England; but even in that country the days of their glory 
seem to be passing away. The recent progress of industry 
has broken down the barriers between separate trades, and it 
is easier to pass from one to another, or even from the ranks 
of unskilled workmen into factories operated by machinery. 
It is now necessary for artisans and mechanics to organize 
with reference to those outside of their ranks, if they would 
protect themselves and advance their industry, or to seek an 
amelioration in their condition through legislation. This is 
an explanation of the "new trades-unionism" in England, 
which strives, on the one hand, to organize unskilled wage- 
earners ; on the other hand, to secure the assistance of law 
in the prosecution of their plans. 

4. Regulation of Wages by Laio. The old law had al- 
lowed justices of the peace to fix wages authoritatively. 
This law, of course, went with the rest, as being opposed to 
free competition in the labor market. Here more than 
almost anywhere else the new principle was put into opera- 
tion. We have seen as a first result the employment of 
women and children instead of men. This was strictly in 
keeping with the principle of free competition, but it pro- 
duced the fearful evils which the factory acts were enacted 
to correct. It was further found that men were often un- 
able to protect their own interests in their agreements with 
the employers. If higher wages were paid somewhere else 
they did not find it out, or if they found it out the}^ and 
their families were attached to the place and could not move 
readily. So lower wages were paid until the man who paid 
more was forced by competition to cut down wages. It is 



50 .Outlines of Economics. 

appalling to watch the development of industry early in this 
century. The limit of wages was bare subsistence, enough 
to keep the wage-earner in working condition, and in tliis 
the employers were apt to calculate below the point of their 
own interest, not appreciating the value of efhcient, well-fed 
employees whom perhaps they had never known. The com- 
placency with which employers fell back on the law of self- 
interest is well portrayed by Carlyle, who represents one of 
them as saying in self-defense: "'My starving workers? 
Did I not hire them fairly in the market ? Did I not pay 
them to the last sixpence the sum covenanted for? What 
have I to do Avith them more ? '" As Carlyle well adds, " We 
have profoundly forgotten that cash payment is not the sole 
relation of human beings ; we think, nothing doubting, that it 
absolves and liquidates all engagements to man." It is here 
that we discover the fatal weakness of the competitive theory 
in its dependence upon the popular political error of the day 
to which we have already referred, the doctrine that "all 
men are by nature free and equal." If they were, competi- 
tion would produce better results. 

The downward movement of wages the trade unions 
claim to have nrrested and even reversed. Certain it is that 
wages have risen during the period of their influence. 
Others claim that the larger wages have been made possible 
only by the larger production of wealth in our age. This 
last was a necessary condition, but if the helpless inequality 
of the laborers while dealing singly with their employers 
had continued it is not clear that wages would have risen 
as production increased. The many disputes and bitter 
quarrels between employers and employees led to legislation 
which aimed to adjust the differences between them. An 
act was passed in 1824 to provide for the settlement of ex- 
isting disputes by justices of the peace or referees. The 
arbitration was compulsorj^ with reference to the decisions, for 
heavy penalties were provided which could be inflicted upon 
those refusing to adhere to them. An act in 1867 established 
"Equitable Councils of Conciliation to Adjust Differences 



Industrial Devolution in England — Part III. 51 

between Masters and Men." These Councils were more 
elaborately constructed, and decisions could be enforced by 
legal penalties. An act of 1872, commonly known as Mr. 
Mundella^s Act, gave power to make settlements with refer- 
ence to the future as well as to settle existing disputes. These 
acts give recognition to the principle of legal regulation of 
controversies, but they have up to the present not been used. 
Voluntary boards of conciliation and arbitration, on the 
other hand, have proved most salutary in England. Social 
action has in that country, as elsewhere, been found neces- 
sary to preserve industrial peace. 

The last three chapters are a brief sketch of England's 
attempt to deal with a new economic theory and a new eco- 
nomic power. The new theory was industrial freedom, com- 
petition; the new force, steam and invention. Both were 
relatively unknown before. The new theory proposed to do 
without benevolence in men or interference from the State, and 
promised immense increase of wealth and harmonious and 
equitable distribution of it among the various parties to its pro- 
duction. Both proposals were assented to; were both prom- 
ises fulfilled ? An immense increase in production did take 
place, due in part to competition, more to machinery. But 
the distribution of this wealth, growing directly out of the 
principles of competition so long as they were unrestrictedly 
applied, was such that poverty grew faster than wealth, and 
the laboring population of the realm sank day by day into 
deeper distress and degradation. The partial benevolence 
of employers, which would fain have mitigated this disaster, 
was, as a rule, neither welcomed nor tolerated by the competi- 
tion which had made itself law. Not until this benevolence 
was formulated, generalized, and enforced by disinterested 
legislation was the horror of the situation diminished. When 
we hear the principle of " a fair field and no favor " and " no 
State intervention " advocated by a man strong in the con- 
sciousness of personal advantages (for such he is sure to be) we 
must remember that he is a century behind his time, and that 
he has not read or has not profited by one of the most dolorous 



52 Outlines of Economics. 

chapters in human history. The English nation, after a trial 
of free competition and no interference, as thorough as could 
well be made, has undeniably returned to the principle of 
governmental activity which she had abandoned — a principle 
which recognizes as the function of the State the pro- 
tection of the citizens and the furtherance of their material 
and social well-being, by every law and every activity which 
offers a reasonable guarantee of contributing to that end. 

The three words which have become the motto of the 
French Republic, "Liberty, Equality, Fraternity,^'' may be 
found on the public buildings of France. These three 
words likewise convey the spirit of the Declaration of Inde- 
pendence. If the aspiration expressed in the motto is ever 
realized it will be because liberty is defined and equality 
secured by fraternity; it will be because benevolence as well 
as competition will rule the economic actions of men ; also 
because social readjustments will render our neighbor's 
interests more nearly our own. It is a matter for regret 
that for so long a time England and America tried to omit 
the last and greatest term from the trinity of this new social 
creed. The theory of the past century erred in its central 
assumption that men were equal. The Creator of the uni- 
verse, for reasons presumably wise, has made impossible an 
equilibrium of balanced selfishness among men. 



Industrial Kevolution in England — Part III. 53 



SUMMARY. 

1. Liberty, to be effectual, is found to require mutual limitations. 

2. Expert examination of certain goods is found to be necessary. 

3. The employer's interest fails to protect employees from bodily injury. 

4. The English Factory Acts protect the interests of women, children, and 
young persons employed in factories, specifying the time and conditions of 
their employment. 

5. Trades unions, at first forbidden, are permitted in 1824, and rapidly 
developed. They powerfully affect the conditions of economic life in England. 

6. They now seek to organize unskilled laborers both in city and coun- 
try, and to secure the aid of legislation. 

7. Legal boards of arbitration are established, but not used. 

8. Voluntary boards of arbitration are widely employed with beneficial 
results. 

9. The principle of non-interference of the State is abandoned as a prin- 
ciple in England. 

QUESTIONS. 

1. What is liberty? What is its counterfeit? What is the result of 
general permission to do as one pleases? 

2. Is there less or more need of law as society develops? Why? What 
change takes place in the character of law as civiKzation increases ? Why ? 

3. What need is there of State supervision of commerce? Is it necessary 
in all lines? Why? 

4. Is self-interest a guarantee of honesty? Why? 

5. Did competition protect workmen from injury ? Why? 

6. What are the provisions of the English Factory Acts ? How do they 
contrast with former labor legislation? What are their defects? Why? 

7. Why Avere trades unions at first forbidden bylaw? What was the 
result? Why was the prohibition removed ? What results followed? 

8. What was the attitude of the earlier economists toward trades unions? 
Why? Of the later economists? Can they affect wages? How much? 

. 9. What is "new trades-unionism? " 

10. How were wages formerly regulated in case of difficulty? Did com- 
petition regulate them successfully? . Why? 

11. What modern means of regulation? Which kind is more used ? 

LITERATURE. 

Brentano, L. : On the History and Development of Guilds and the Origin of 
Trade Unions. 

Trant, W. : Trade Unions. 

Seligman, E. R. A. : Tloo Chapters on the Mediceval Guilds of England. 
American Economic Association. Yol. II, No. 5. (Contains a bibliography.) 

See also references to preceding chapters. 
5 



'>f i CHAPTER VIII. 

REMARKS ON THE ECONOMIC HISTORY OF THE UNITED STATES. 

The economic history of the United States is, in part, the 
history of an attempt to apply the principles of free compe- 
tition and a minimum of interference on the part of the 
State to a new country instead of an old one. This differ- 
ence is so great as to have modified the result materiall3^ 
As is well known, the principle of non-intervention was 
adopted here more widely than in England, where the State 
has never ceased to exercise a certain control over religion. 
Politically and economically, also, the principle of no State 
interference beyond what is absolutely necessary was in the 
main recognized for a time. In some particulars the results 
have been parallel, in others not. There has been the same, 
perhaps an even greater, increase of wealth-production, with 
a concentration of wealth which is without parallel in mod- 
ern times — which means the growth of great fortunes — the 
same extension of commerce, development of railways, and in- 
troduction of machinery. In the most important points, how- 
ever, the darker side of England's experience does not seem 
to liave been fully repeated here. We have never known 
such low wages, such extended poverty, such suffering and 
starvation on a large scale. Real wages are said to have 
risen gradually throughout our history, and this, with numer- 
ous exceptions, may not be far from the truth. Our expe- 
rience, therefore, has, at first blush, not seemed to condemn 
a passive policy of government so strongly as has that of 
England. The question, therefore, naturally arises whether 
the conclusions drawn from English experience were correct. 
Which of the two countries has given the principle the fairer 
test ? 



The Economic History of the United States. 55 

It will be remembered that the suffering accompanying 
the industrial revolution in England was of two kinds. One 
was temporary or transitional, the other was permanent or in- 
herent in the system. The first was due to the simple fact 
of changing. No matter what the change might be, if it 
were equally sweeping and rapid, suffering could scarcely 
fail to result. Thus a new method was introduced, and those 
who practiced the old must lose their occupation and in- 
come. Not seeing that the change was coming, they did not 
adapt themselves to it, and were sacrificed to it. Trade 
drifted from the country to the town, and from one town to 
another, the retreating wave leaving many helplessly stranded. 

The second kind of suffering came not from change, but 
from the very nature of the system introduced, from the 
sacrifice of the weak to the strong in the soulless struggle 
for existence. This lowering of factory wages and degrada- 
tion of factory operatives would, apparently, have happened 
just the same if the system had come in ever so slowly or 
had existed from the first. Now both these difiiculties in 
our economic experience have been offset by features pecul- 
iar to our country as compared with England. 

Diffioulty of Transition. — This was slight in America, 
because in changing to the new system there was little to 
change from. Our economic littleness was our salvation. 
Our industries were scarcely started when the steam engine 
was introduced, and so from almost the beginning the fac- 
tory system seemed the natural one. Such change as there 
was from hand industries to power manufacture produced 
results similar to those in England; but this change was rela- 
tively so insignificant in amount as to attract comparatively 
little notice. Moreover, the artisans thrown out of employ- 
ment found new employment in the growing industries and 
moved willingly from place to place, as English artisans did 
not do. This was due to local causes. Thus the change 
which in England was a revolution in America was an evolu- 
tion^ a process that built much and destroyed little, because 
there was little to destroy. 



56 Outlines of Economics. 

Difficulty of Operation. — The workingmen of this coun- 
try seem not to have played a continually losing game, as 
did their English cousins, during the period of unlimited 
competition. The reason is in a way the opposite of that 
just considered. If the littleness of oar industries has saved 
us from the friction of transition the bigness of our terri- 
tory has saved us from the friction of operation. The Amer- 
ican workman, either by immigration hither or by the inherit- 
ance of traditions that are national, moves about quite freely 
in search of his own interests. Through our industrial his- 
tory to the present he has been able, by going a reasonable 
distance, to find cheap or free land where he could earn an 
independent living. Under such circumstances it has been 
impossible for the pressure of competition to work out its 
natural results in manufacturing industries. It is free land 
rather than a protective tariff which has kept up the wages 
of labor, and if that resource, which has thus far tempered 
the asperities of the struggle, once disappears we may look 
for different results unless new safeguards take its place. 
It is, of course, objected to this and many previous state- 
ments that wages are determined by the product of industry 
divided according to immutable laws; to which it maybe re- 
plied that even if this theory of " immutable law " be true — 
a very doubtful " if" — it holds only as a contract holds which 
divides the profits of a partnership, a division which is in nowise 
certain to be realized if some of the partners are unable to 
interpret the contract. There is no conceivable expedient by 
which the weak and ignorant can associate with the strong 
and unscrupulous without increasing detriment to the for- 
mer, unless strength and disinterestedness from without in- 
terpose efiiciently and permanently in their behalf. Favor- 
able as has been the situation of the United States, her 
economic history furnishes abundant illustrations of this 
fact. As free land becomes less abundant and less accessible 
the wage-earning portion of our eastern population finds con- 
ditions of life forced upon it which at least hold down if they 
do not lower the standard of life. Pauperism is undoubtedly 



The Eoonomio History of the United States. 57 

increasing with the increase of wealth, and extremes of con- 
dition and alienation of classes are familiar to all. Riots 
that call for military interference testify to the fact that we 
have not escaped, and are escaping less and less, the friction 
that accomj^anies all unfraternal arratigements among men. 
Between the two experiments, therefore, we cannot for a 
moment hesitate as to which has fairly tested the system. 
All countries tend t@ fullness, and newness always disappears 
in time. That system which will not work in a thickly set- 
tled country is a condemned system, for it fails to work 
under what are now generally, and will soon be universally, 
the normal conditions of human life. 

Competition among Employers and Centralization. 
— We have so far considered the effects of competition upon 
the laborers, and in tracing this effect the history of England 
has been peculiarly instructive. When we turn to the results 
of competition upon the employers we shall find that the his- 
tory of our own country is more conclusive. Owing to the 
peculiar circumstances of our situation the results of compe- 
tition among emploj^ers have been developed more rapidly 
than abroad. While the conflict between workmen and 
employers led to a certain feeling of common interest be- 
tAveen the latter, and frequent combinations among them- 
selves for mutual protection against workmen (combinations 
which the English law never prohibited), the principle of 
competition made them perfect Ishmaelites in their relations 
with each other. If they could undersell each other or outdo 
each other, by any means recognized in the very flexible 
code of business honor, they did so. One of the saddest 
things about the history of oppression of labor, which we 
have been considering, was the fact that often when employ- 
ers were dictating ever-harder terms to their men they were 
themselves crowded to the wall and compelled to fight for 
existence by the merciless competition among themselves. 
Oppression thus necessitated oppression. Of course the 
general 23ublic, including w^orkmen, stood at the end of this 
series and profited by the lower prices; but in such a series 



58 Outlines of Economics. 

the lowest term suffers most and profits least by the reduc- 
tion. The employer's position, however, not infrequently 
was such as to appeal to sympathy. 

In America, where no old system had existed to establish 
conservative traditions, and where the acquisition of wealth 
has been a far more distinctively national passion than in 
England, the law of competition has operated far more fully 
among employers than it has in England. The resources 
which have so mitigated the lot of the employee have not 
been available for the employer. Enslaved by fixed invest- 
ments of capital, he has had to fight out to the end this war 
without quarter. In every such warfare the number of com- 
batants tends to decrease. In spite of the enormous growth 
of our industries and population, a growth which continues 
with unparalleled rapidity, the number of competitors in 
many industries, though greatly increasing at first, has of 
late shown a remarkable decrease. In 1870, according to the 
United States Census, there were in the Southern States 175 
concerns engaged in the manufacture of iron and steel, with 
a capital of 113,372,085 and an annual product of |2 1,472,665. 
In 1880 there were 218 firms, with a capital of $29,145,830 
and an annual product of $25,353,251, an increase of 24.6, 
118, and 18 per cent respectively. In 1890 the capital had 
increased to $50,845,666, or over 74 per cent as compared 
with 1880. The annual product had increased to $42,590,822, 
or about 68 per cent. 13iit the miinher of concerns had de- 
creased to 145, or over one third. The woolen manufacture 
presents a still more striking example. According to the 
census there were in the United States, in 1870, 3,590 con- 
cerns in this business ; in 1880 the number was 2,689, and ia 
1890, 2,503. In spite of this decrease, the amount of goods 
manufactured increased in the last decade over one fourth, 
and the capital employed in an even greater degree. The 
illustrations we have chosen are good types of the industrial 
progress of the country. Competition attained its maximum 
in the decade between 1870 and 1880. It became familiarly 
known as " cut-throat competition," and but for the existence 



The Economic History of the United States. 59 

of free land, un worked resources, and the constant increase 
of inventions, widespread disaster must have resulted. Since 
then the number of competitors who have been forced out of 
the struggle has steadily increased and business has fallen 
into fewer and fewer hands. This centralization of estab- 
lished industries has been much more rapid in America than 
elsewhere, due primarily to the absence of hampering con- 
ditions, especially to the lack of legal restraint, which has 
characterized our economic history ; also to the presence of 
conditions positively promoting centralization, like the favor- 
itism which has been shown by railways to a fortunate few. 
Thus the fruit of the system is ripening sooner than else- 
where. 

Monopolies. — The centralization of which we have 
spoken is only a partial one. It does not necessarily lessen 
competition at all. It only gives the business into the hands 
of those competitors who are best able to continue it under 
the rigorous conditions which competition has imposed. 
Other things being equal, the large concerns have the best 
chance, and so the tendency is more and more to give them 
the business. This seems plainly a reasonable thing to do, 
and up to the time we have mentioned, some fifteen or 
twenty years ago, there was a very general belief in the 
efficiency and sufficiency of competition to control all indus- 
tries. Horace Greeley even urged that it would be advanta- 
geous to turn the business of the post office over to the 
express companies and thus subject it to the great law of 
competition. But experience has shown that under certain 
circumstances competition ceases altogether and abandons its 
beneficent control. Tliis makes a mionopoly^ which is notJiing 
else than a business not limited by competition. A monopoly 
results whenever one competitor enjoys certain advantages 
Avhich the other competitors cannot obtain, and the process 
of competition goes on far enough to drive them from the 
field. This advantage may be natural or artificial, and 
accordingly we have natural and artificial monopolies. 
Artificial monopolies usually depend on some favoritism of 



60 Outlines of Economics. 

legislation or of great corporations like railways, or sovereign 
power shown to special individuals. Such were the rights 
of exclusive manufacture or trade in certain commodities 
granted by monarchs to their favorites. These were one of 
the most hated features of the old system against which 
Adam Smith and the men of his day rebelled. Tariff laws 
are sometimes so framed as to favor certain individuals, 
under the guise of general rules, and thus form the basis of 
monopolies. There is generally very little excuse for arti- 
ficial monopolies save in the case of patents, copyrights, and 
the like, and of course they can be terminated by removing 
the artificial prop which supports them. 

But natural monopolies are a different matter. We can- 
not legislate away the inequalities of nature in such cases. 
The growth of natural monopolies has of late years been 
j^rodigious. Without trying to make an exhaustive list the 
following monopolies may be mentioned as having assumed 
national importance. First, the railways are at least partial 
monopolies, and their residual competition is constantly di- 
minishing. Great commercial cities like Chicago and New 
York are connected by several lines, and at times a fierce 
struggle breaks out under such circumstances, but an agree- 
ment is soon reached and the minimum of competition re- 
maining relates to quality of service rather than to price. 
Even the competition in quality is less than is often claimed, 
affecting chiefly a few through trains. But the great major- 
ity of people in the United States are not situated like the 
residents of New York and Chicago. Smaller places are 
often connected with larger places and with one another by a 
single line, and do not have the benefit of even the minimum 
of partial competition which exists elsewhere. The power of 
railways left to themselves is almost unbounded, far greater 
than that of any sovereign. By far the larger number of 
towns in the United States are on one line of railway only, 
and even if all were on more than one line of railway the 
ultimate result would be combination and monopoly. 

Instances are numerous where railways have so regulated 



The Economic History of the United States. 61 

rates as to kill one town and build up another as they saw 
fit. In the West they have built grain elevators, allowed no 
private elevators on their track or charged exorbitant rates 
for private shipments, and thus compelled farmers to sell 
grain to them at their own price. They have put up and 
overthrown manufactures as they chose. So great has be- 
come the importance of transportation in our day that the 
control of it by a monopoly is the most far-reaching tyranny 
now made possible by our economic life. 

The second important group of natural monopolies with 
which we have become familiar consists of those which Ave 
may know as the centralized branches of municipal supply. 
These are city water works, city gas works, electric lighting 
plants, street-car lines, and possibly others. That these 
industries are monopolies by nature was not at first clear, but 
now it is generally admitted. For instance, though there 
may be several street-car lines in a city they cannot be in 
the same street and cannot compete to any considerable ex- 
tent. Competing gas and water companies may exist in the 
same city and lay parallel systems of pipes, but the cost 
of such a system of pipes with a central plant is so great 
that the interest on the capital thus invested constitutes a 
very large part of the cost of gas and a still larger part 
of the cost of water. So, when two plants are put in to do 
the work of one, the increase of cost is so great that it more 
than balances the gain from competition. Competition in 
such cases is therefore justly regarded as out of the question, 
and rival companies never long compete in good faith. 

The third group of natural monopolies consists in the cen- 
tralized control of great natural treasures. The principal 
examples are the Standard Oil Company and the " Coal Com- 
bine." These two monopolies control almost completely the 
price of two important commodities. It is to be noted that 
both these monopolies owe their existence in the first 
instance to the previous monopoly of railways. Natural gas 
also may be instanced as an illustration following under this 
head. 



62 Outlines of Economics. 

In addition to these monopolies, which plainly have a 
natui'al basis, there has been of late a remarkable movement 
toward the formation of monopolies in other industries wliich 
have become highly centralized. When an industry has 
fallen almost entirely into the hands of a few large and ably 
managed concerns these have united in an agreement not to 
compete' with each other in the matter of price. They have 
usually limited the amount of the total output and assigned 
a certain quota to each concern. These combinations, vari- 
ously known as pools, combines, and trusts, according to the 
method of their organization, are a matter of great interest, 
and, it must be confessed, of considerable anxiety in our own 
day. So long as they last they constitute real monopolies 
and regulate prices wholly in their own interest. There are 
those who claim that all industries will become monopolies 
if competition is unchecked; that competitors are never long 
equal, and that the first result is bound to be centralization 
and the final result monopoly. The instability of most pools 
and trusts up to date gives little warrant for such an asser- 
tion. Experience beyond what we now possess is necessary 
to decide. All we can now say is that certain industries, by 
virtue of natural inequalities necessarily existing between 
the competitors, if left to the control of competition, inevi- 
tably become monopolies, while others find it seemingly im- 
possible to escape from the control of the competitive 
principle. While it is difiicult to draw the line between 
these two kinds of industries they seem none the less to in- 
dicate the existence of two separate industrial fields, the 
monopolistic and the competitive, requiring different princi- 
ples of control. 



The Economic History of the United States. 63 



SUMMARY. 

1. Non-intervention in its extreme form became the early policy of the 
United Stales. 

2. Tlie transitional suffering which accompanied the industrial revolution 
in England was avoided in tlie United States by the fact that industries 
were but little developed under the old plan. 

3. The tendency of the new system to depress wages was prevented by 
the competing presence of free land, and by the greater mobility of American 
labor. 

4. On the other hand, competition among employers has been severe and 
often self-destructive, resulting largely in consolidation. 

5. The development of monopolies based on natural or artificial advan- 
tages has been a marked feature of our industrial experience. 

6. These are chiefly in transportation, collective municipal service and 
natural treasures, with a suggestion of possible monopoly in other fields. 

QUESTIONS. 

1. In what respect has private enterprise had freer scope in America 
than in England? Its results on labor? Why? Will these results be 
permanent ? Why ? <» 

2. Why has comf)etition among employers been freer than in England? 
What has been the result ? 

3. What constitutes a monopoly? What is the difference between a 
natural and an artificial monopoly? Mention examples of each. Classify 
the former. 

4. Is general manufacturing and commerce liable to become monopolistic? 
Why? 

LITERATURE. 

Ely, R. T. : Labor Movement in America. 

Rand, Benjamin: Economic Historij Since 1873. Chapter XY. This 
chapter contains four reports made for the Tenth Census by F. A. Walker, 
Carroll D. Wright, Edward Atkinson, and James M. Swank. 



CHAPTER IX. 

TENDENCIES TO REACTION AGAINST A PASSIVE POLICY OF 
GOVERNMENT IN THE UNITED STATES. 

We have seen that the misery and degradation of the 
wage-earning classes which led in England to the reaction in 
favor of an active policy of government did not at first exist 
in the United States to so great an extent as to require and 
secure legislation in their behalf; but soon similar conditions 
led to like results, and in most of the commonwealths of the 
American Union we have now a considerable body of factory 
laws for the protection of the wage-earning classes and for 
the promotion of their interests. Massachusetts leads the 
coujitry in this respect, and the factory legislation of this 
State is probably surpassed only by that of England. The 
growth of factory legislation in our country illustrates the 
principles already stated, for it follows the lines of indus- 
trial development spreading from New England to the West 
and the South, but more slowly in the latter direction. 

Nor has the adulteration of foods or the falsification of 
wares ever received any such attention as in England, though 
here there has been need enough surely. Not only have we 
become painfully familiar with the style of goods which the 
competitive system always produces, and which in England 
are known by the expressive term " cheap and nasty," but 
dangerous adulterations are as common here as anywhere in 
the world. The fact that the theory of non-interference was 
not so completely broken down by the pressure of labor inter- 
ests, together with the general weakness of our administrative 
system, accounts, in part, at least, for the general reluctance 
to intrust to government in this country the duty of inspecting 
wares and products of manufacture. But the recent growth 
of monopolies has been a problem calling for earnest thought 



Keaction Against a Passive Policy, 65 

and revision of opinion. Of course the objection to monop- 
olies has been that they were able and inclined to regulate 
prices entirely for their own interest. Even this would have 
been less objected to if the employer, thus relieved from the 
necessity of forcing down wages, had been careful to divide 
the profits thus increased with his employees. But the 
schooling obtained in the great struggle which had made mo- 
nopoly widespread was not of a kind to make men " tenderly 
affectioned one to another," and the increasing size of man- 
ufacturing concerns had hopelessly separated the two classes. 
It has clearly not helped the wage-earning classes that profits 
have been increased by monopolistic control. The same 
could be said of other important interests. Never was in- 
dustry more careless of life than under monopolistic control. 
The greatest of our monopolized industries, the railways, 
in 1892 sacrificed the lives of over seven thousand persons, 
a number almost incredible to one accustomed to the legally 
enforced precautions of European countries. Far more em- 
ployees than passengers were killed ; and the lives of most 
of them, and of many of the passengers and other persons 
killed, might have been saved by the adoption of safeguards 
perfectly well known, and not adopted, simply because of 
their cost. 

The history of our attempt to control monopolies is long 
and confusing. In general, however, three methods have 
been emj^loj^ed — competition, government regulation, and 
government ownership. Let us notice briefly each of these 
methods. 

Competition. — This was the favorite method of dealing 
with natural monopolies so long as competition was regarded 
as the only safeguard of industry. It has been tried esj)e- 
cially in railways and in gas service. We may say, in a 
way, that the history of our railway business is the history 
of competing lines which have tracked each other across the 
country, endeavoring rather to overreach each other than to 
serve the public. While we can safely assert that but for 
the rivalry of competing roads the enormous fixed invest- 



QQ Outlines of Economics. 

ments of our railways could have been much better distrib- 
uted for the service of the country, it must be admitted that 
the competing lines thus constructed have often served dif- 
ferent local interests, and they have been constructed accord- 
ing to the dictates of competition. But it is not this com- 
petition which is significant under the heading of this chapter, 
fQ| this was not an abandonment of the principle of competi- 
tive control, but an avowal of it. Not so, though, with 
certain cases like that of the West Shore Railway in New 
York. This was built almost absolutely parallel to the New 
York Central, whose monopoly of the carrying trade of 
central New York it was designed to check. To insure this 
object the charter provided that it should never sell out to 
the New York Central Company; that is, it should forever 
comjDete with it. Let us notice the real nature of this provi- 
sion. The doctrine really at the bottom of the whole was 
that the State should not interfere with private enterprise, 
but should allow free competition to regulate prices. But, 
free competition having failed in the case of railways, the 
State seeks to establish compulsori/ competition, which is as 
direct a form of State interference as well could be. But 
so strong is the faith in competition that the State, having 
decided to interfere, does so through ihefo7'm of an artificial 
competition, the most expensive and least efficient means that 
could be devised; expensive because the public were com- 
pelled at once to suffer the complete loss of the needless 
railway and ever afterward to pay charges high enough to 
cover interest on the larger capital. The State thus sought 
by increasing the cost of transportation to lower profits, 
Avhereas the real object to be obtained was lower charges and 
better service, both of which were prevented by the building 
of the new road. So much for the economy of the method; 
now for its efficiency. After it was opened for a few years 
the road was leased to the New^ York Central Company for four 
hundred and seventy-five years, and has since been run as a 
needless fifth track to their four-track road. Competition 
is postponed until the expiration of the lease. The same 



Reaction Against a Passive Policy. 67 

experience has been continually repeated in the case of gas 
service. Cities oppressed by monopoly have eagerly wel- 
comed a new company which has torn up their streets and 
inflicted on them great inconvenience to lay a second system 
of gas mains, hoping thereby to get competitive prices. 
What has been the result ? After a brief pretense of com- 
petition, rather, indeed, industrial war, the new company, 
whose purpose from the first had only been to force the old 
company to divide its monopoly profits with them, has con- 
solidated with its rival, and prices are as high as before, with 
this important difference, that before they would admit of 
great reduction by legal enactment, while now they imcst be 
high to pay interest on the capital so needlessly increased. 
We may lay down the general maxim, deduced from our 
national experience, that the public must pay for every article 
needlessly duplicated in monopoly service^ and that, too, with- 
out compensating benefit. So thoroughly has this method 
been discredited by experience that laws have been proposed 
in certain States forbidding the construction of needless 
competing railways as resulting in a loss to the public. 
Professor Jevons claims that Englisli railways could carry 
passengers in first-class cars at one cent a mile (the present 
rate is three and one half cents) were it not for the waste- 
fulness with which they have been constructed under the 
system which we have been considering, and, doubtless, 
much the same could be said of our own. 

Government Regulation. — We have already seen that 
tlie system of enforced competition is a species of govern- 
ment control by clumsy and costly means. It is a sort of 
compromise between new necessity and old tradition, a sort 
of compulsory freedom with most of the losses and few of 
the gains of either system. From this half regulation we 
now pass to the avowed application of the principle of State 
control. This began on a considerable scale more than 
twenty years ago, at the time of the granger movement, as it 
was called : at first an uprising of unorganized farmers 
against railway claims and abuses; later, an organized move- 



68 Outlines of Economics. 

raent which centered in the "Order of the Patrons of 
Husbandry," an organization of farmers, founded in 1867. 
Laws were passed in a number of States regulating rates and 
binding the roads by many rules of action. Much of this 
legislation was ill-considered, passed under pressure of popu- 
lar excitement, and soon repealed. One unfortunate result 
was the discouragement, for a time, of further attempts at 
regulation of railway traffic. Since then, however, the effort 
to control railways by legislation has steadily increased in 
strength, and has resulted in the creation of the State rail- 
way commissions in most of our States and of the federal 
interstate commerce commission, with certain powers of 
adjudication and control. The application of the principle, 
however, has proved exceedingly difficult. The railways 
have endless ingenuity at evasion and large power of retalia- 
tion. They so generally cross the State boundaries that 
State laws are of comparatively little effect. No more 
troublesome question of practical legislation now confronts 
our people. 

The principle of municipal control has resulted even less 
satisfactorily. Very seldom have equitable prices been 
secured, while the corruption of city councils by monopoly 
money has been notorious. Thus the enormous needless cost 
of various municipal services has often been divided between 
illegitimate profits and still more illegitimate bribes. The 
" Broadway Street Railway " franchise in New York is still 
fresh in memory. The councilmen were bribed to give away 
a franchise worth an immense sum, and, though the criminals 
were punished, and the fraudulent charter nominally re- 
voked, by a legal decision the franchise and all assets 
of the company were turned over to the directors to be 
administered for the benefit of the stockholders, and the 
effect was practically nil. This decision of the New York 
Court of Appeals, it ought to be said, has often been called 
in question, and it is to be hoped that it will not be followed 
by other courts. This episode illustrates the great weakness 
of the system of municipal control, a corrupt council having 



Reaction Against a Passive Policy. 69 

power to perpetuate indefinitely the mischief they do. Here, 
if anywhere, " the evil that men do lives after them." On 
the other hand, it is equally true that honest councils have 
often exerted their power wisely and secured bargains 
reasonably advantageous to the city. Still, the most san- 
guine advocate of municipal control, as opposed to munici- 
pal ownership and management, would hardly claim that our 
experience in this respect has been satisfactory. 

G-overnment Ownership. — This principle, which has 
been extensively adopted in European countries, has, with 
exception of the post-office, been applied in our own only 
to municipal monopolies, and that to a limited degree. It 
is now the generally recognized principle for the manage- 
ment of city water works. Why it should be applied here 
more than to other branches of the municipal service is not 
clear. It is, to be sure, the most essential of all, and the 
necessity of a supply that shall be abundant, constant, cheap, 
and pure imperatively demands the most efficient and re- 
liable management possible. It is significant of the growth 
of popular sentiment that this necessity has led cities gen- 
erally to resort to municipal ownership to secure this result. 

Municipal gas works now exist in a number of American 
cities and are regarded with increasing favor. The most 
rapid extension of this principle, however, comes in the case 
of electric lighting plants, which are now being introduced 
throughout the country. Yery many cities have adopted 
the principle of municipal ownership, and the tendency to do 
so increases. Without anticipating here the discussion of 
this principle, which belongs in another place, it may be said 
that the reduction in expense to those cities owning their 
own plants has been very great indeed, while up to date few, 
if any, cases of failure or mismanagement seem to have been 
reported. The means of bribery and the occasion for it 
seem to have been largely reduced. 

As a result of the century's experience present opinion 

seems to tend toward — 

1. Private enterprise in the competitive field. 
6 



70 Outlines of Economics. 

2. GoYernment ownership in the field of monopoly. 

3. Right of private organization for all legal purposes. 

4. Government regulation of private industry to protect 
the life, health, education, and general welfare of workmen. 

5. Government arbitration, if needed, to settle labor dis- 
putes. 



Reaction Against a Passive Policy. 71 



SUMMARY. 

1. The enactment of factory laws in the United States has been less gen- 
eral than in England, but not inconsiderable, especially in some States. 

2. The testing of foods and other products in America has been generally 
neglected. 

3. Monopolies have, on the contrary, attracted much attention. 

4. State encouragement to competition in the case of natural monopolies 
has been a disastrous failure. 

5. Grovernment regulation of monopolies by law has been tried with but 
partial success, especially in the case of municipal regulation. 

6. Municipal ownership of local monopoly services has proved more satis- 
factory, and is increasing in favor. 

QUESTIONS. 

1. Against what features of our industrial system has there been a re- 
action? Contrast with England? 

2. What is the result of competition as a means of controlling natural 
monopolies ? Why ? 

3. What effort has been made to control railways by legislation? With 
what result? Why? 

4. What is the difficulty of municipal control of collective services ? Why 
must this be so? 

5. What new principle has this difficulty developed? Where has it been 
most extensively applied? To what branch has it been applied in the 
United States ? What are its results ? Why ? 

LITERATURE. 



Ely, R. T. : Problems of To-day. 
See references to preceding chapter. 



CHAPTER X. 

THE NATURE OP THE SUBJECT OF EGONOMIO STUDY. 

We began this book by saying that economic history was 
the history of man in his efforts to get a living; that is, to 
get and to use material things to supply his wants. It would 
have been easy to begin at once to define the subject and lay 
out the principles of our science, instead of going so much at 
length into the history of economic effort; but we should 
have missed some important points or been in danger of 
missing them to some extent. The things which science 
learns from history can usually be duly impressed upon us 
only by the study of history. In a way we may know the 
results of human experience without history, but to follow 
that experience with something of attention and sympathy 
adds a new and deeper quality to our knowing. What facts, 
then, are especially worth noticing as we follow this age-long 
struggle of man to get a living ? 

1 . Economics Treats of Man. — In the first place, we 
should note the importance of inan in contrast with all the 
things we have been considering. This seems a very com- 
monplace remark, but the fact is, men who have studied 
this science have often not appreciated this fact at all. 
Among the most serious mistakes is to consider man simply 
as a producer of goods, one " by whom " are all things of 
interest to our science, while the infinitely greater truth is 
that man is the one "/or whom " the}^ are all produced. Of 
course no one denies this truth, but men might almost as 
well deny it as to leave it out of account. The result of 
such neglect is that men devise with great skill rules by 
which man may be made the best possible manufacturing 
machine. It sometimes quite escapes the notice of these 



The I^ature of the Subject of Economic Study. Y3 

wise men that in making of man the best possible manufac- 
turing machine they may make him a very poor sort of a man ; 
that in teaching him to supply his wants very bountifully 
they may prevent his developing and correcting those same 
wants. They forget that there are two kinds of povert}?-, 
one a lack of goods for the higher wants, the other a lack 
of wants for the higher goods. To become rich in goods 
"wHile losing at the same time the power to profit by them 
is unfortunately one of the commonest retrogressions in 
human experience. We do not mean that the whole prob- 
lem of human development is the subject of economics, but 
simply that manhood, rounded human development, is the 
goal of all social sciences, and none must consider their sub- 
ject so narrowly as to exclude that object. 

Another common mistake has been to regard as of chief 
importance a class of men in their efforts to get a living, 
especially the employer. Other men were treated simply as 
" a factor in production." An English writer speaks of dear 
labor as one of the chief obstacles to England's economic 
prosperity. Could anything be more utterly an oversight of 
general human well-being? Dear labor should be the very 
goal of England's economic effort, for that means abundant 
supply of the wants of the great mass of her people ; and 
the fact that labor is dear, so far from being an obstacle 
to prosperity, is the very proof and substance of that 
prosperity. Our glance at history indicates that men 
have made these mistakes not only in theory but in practice. 
Industries have been developed to majestic proportions while 
man was sinking into deeper degradation ; wealth has grown 
at the expense of that human weal in whose service it won 
its name. 

2. Economics Treats of Man in Society. — This is 
another truism which only history can make true to us. We 
have seen as we pass from the savage and cannibal, up 
through all the stages of development, an ever-increasing in- 
terdependence among men. Man is least dependent when he 
wants least, cares least, has least, knows least, and is least. 



74 Outlines of Economics. 

With every betterment of condition and character he is 
more dependent than before, more dependent and yet more 
really free. The beginnings of barter are a confession of 
mutual need ; the coining of money is a declaration of 
dependence to all men. We look with pride upon a century 
of progress, but that progress has consisted in little else than 
a growth of dependence, an ever-increasing departure from 
that rude kind of literal self-help in which each one does 
everything for himself. Our fathers drew water, each for 
himself, in "the moss-covered bucket," while our mothei's 
dipped candles for the evening's light. If one was negli- 
gent the rest did not suffer. To-day a network of pipes 
radiate from a common center to enter a thousand house- 
holds. An engineer makes a blunder at the station and 
thousands are in darkness or drought. Society is an organ- 
ism, and that increasingly. Progress is nothing other than 
the building of the organism called society out of the atoms 
called men ; a passage from independence to dependence, 
from distrust to confidence, from hostility to amity, fi-om 
helplessness to helpfulness, while the great law of social 
solidarity gains ever-increasing importance. Our science, 
then, is interested wholly in man in his relations to others, 
not at all in man by himself. Moreover, as a science which 
studies the present, in order that it may predict and prepare 
the future, discovering that interdependence is the law of 
progress, it must not hesitate to shape its principles with 
reference to a solidarity which shall grow more rather than 
less, stronger rather than weaker. 

3. Economics Treats of Man as in Process of De- 
velopment. — Few truths are more easily admitted or more 
persistently ignored than that of change in human life and 
condition. History makes it real. Man now wanders about 
by force of necessity and age-long habit, now starves rather 
than be moved from his home. Land is now free to all, now 
parcelled out with well-nigh absolute right of individual pos- 
session. The seemingly eternal features of the social struc- 
ture are gone in a few generations. Nothing so invalidates 



The N"a.ture of the Subject of Economic Study. ^5 

theories, laws, general principles, institutions, and enterprises 
as this great law of change of which we seldom take full ac- 
count. Take, for instance, bequests. Nothing is commoner 
than for a man to leave a legacy under specified and detailed 
regulations, binding for all time. One leaves money to en- 
dow a religious service in a language which in a few genera- 
tions no one understands; another founds a college to teach 
certain doctrines which in a century no one believes; and so 
on indefinitely. These and a thousand other laborious efforts 
of statesman, warrior, or philosopher quite lose their worth 
for the future because their authors assumed that the future 
would be like their present. 

This was the mistake of the early economists. They dis- 
cerned, often with great clearness, some of the forces then 
at work in economic life, and correctly measured their influ- 
ence. But while some of these were fundamental and per- 
manent others were scarcely more than the accidents of 
their day. Thus work which was exceedingly well done had 
soon to be undone, and was the source of persistent fallacies. 
Especially must we remember that the magnitude and pres- 
ent importance of an institution argue little as to its perma- 
nency. The wages system and the division between capital 
and labor seem rooted in the constitution of societj^, but 
they are scarcely over a century old as a general system. 

We may properly study economic life in a temporary and 
local stage of its development if we recognize it as local and 
temporary, and do not generalize from it for other times and 
places. Such a study is a static or standing-still study, and 
bears much the same relation to the whole subject as an in- 
stantaneous photograph of a crowded thoroughfare bears to 
the life of the street. If, on the other hand, we study eco- 
nomic life in its changes, determining the laws of those 
changes and their direction, we have a dynamic science, or 
a science of forces hi action. It is as though we followed 
up the men on the street day after day until we know who 
they are, where they come from, where they are going to, 
and what is likely to come of all their doings. It is a harder 



76 Outlines of EconomiOS. 

and more valuable study. One object of introducing the 
study of history into that of economics is to change it from, 
a static to a dynamic science. 

4. The Laws with which Economics Deals. — The 
question is often asked whether economics is a science based 
upon natural law. Such questions in their nature are some- 
times largely questions about words. What do we mean by 
natural law ? In the narrowest sense natural laws are the 
liabits of nature which know absolutely no variation. Such 
are gravitation and chemical affinity ; and the sciences based 
upon such laws — astronomy, physics, and chemistry — were 
the first to develop, and have attained a maximum degree of 
exactitude. The term science is sometimes used in a way to 
imply only sciences of this character. These sciences are 
more properly known as exact sciences, and they are charac- 
terized by the fact that the relations with which they deal 
can usually be expressed quantitively, that is, in terms of 
mathematics. 

When we come in contact with life, however, and espe- 
cially with its higher forms, the exactness with which an 
astronomer predicts an eclipse or a chemist anticipates a re- 
action becomes impossible. Not that life is without laws ; 
very far from it. There is, in the first place, the basis of 
physical nature, w^ith its perfect regularity, upon which all 
life rests and to which it must conform. Then, too, there 
are laws governing life directly and pertaining to it. These 
form the subject of the group of sciences known as biology. 
We must remember, however, that all we can say of natural 
laws is that they are habits, not compulsory necessities of 
nature, and the laws of life seem to differ from those of 
inanimate nature in that they are not quite invariable habits. 
Variability seems to be inherent in life, increasing as life 
rises in the scale of development. It is often assumed, to 
be sure, that these laws are as invariable as any other, and 
that this seeming variability is only a greater complexity 
which we do not yet understand. However that may be, the 
result is the same for the present. The sciences of life are 



The Katuke of the Subject of Economic Study. 77 

not exact or mathematical in the sense we have defined. 
We must further note that in so far as a science deals with 
facts which seem to be governed by no invariable law, or 
whose law has not been discovered, it must content itself 
with a description of this part of its subject. Thus we have 
the term descriptive science. We might better speak of the 
descriptive part of a science, for all sciences are able in part 
to reduce their facts to law. 

What has been said of the sciences dealing with life ap- 
plies to an even greater extent to those sciences which deal 
with man. It is perfectly true, of course, that within certain 
limits man is governed by absolutely invariable laws. He 
is as much bound by gravitation as anything else, and if he 
falls over a precipice we can predict the results as certainly 
as thou<?h a stone fell over. But, without enterinof the boo: 
of discussion as to the nature of human freedom, we may 
safely assume, for practical purj)oses, that man is also, 
within certain limits, a law unto himself. ^ Xowhere do we 
find an element of variability so great and so seemingly 
ultimate as here. We must remember, therefore, that the 
sciences which deal with man deal with a beinsr who is mod- 
ified by his environment, hut who has the power of modifying 
that enmroninent hy his own conscious effort. Let us consider 
very carefully what this means. It does not mean simply that 
man modifies his environment because he has been modified by 
it and so reacts upon it, just as things do when they come in 
contact. If we accept this view we shall come to Mr. Herbert 
Spencer's theory of natural selection. The forces at work 
accomplish their own results, according to this theory, whether 
man will or will not, simply by natural action and reaction. 
This implies that man is modified by his environment, 
and that he in turn modifies that environment without con- 
scious effort. This theory is based on an assumption that 
man has no power of initiating an influence, and consistently 
concludes that social development, like geological develop- 
ment, must be left to work itself out. Mr. Spencer, however, 
goes farther, and stoutly maintains that man by conscious 



Y8 Outlines of Economics. 

effort, especially by collective or state effort, not only does 
not help this development, but actually hinders it. In this 
the whole theory is abandoned, for it is plain that if man by 
conscious effort can hinder a process he can help that process 
in the same way if he only has enough wisdom and sense. 
These it is the purpose of science to give him. 

In opposition to the theory of natural selection, or uncon- 
scious development, has been urged the theory of artificial 
selection, or conscious development. Ages of natural selec- 
tion made of the potato a lean, watery, unpalatable tuber ; 
a few years of artificial selection made it a valuable food 
product and a table delicacy. Compare the development of 
domestic animals in the last few years, under man's conscious 
guidance, with their slow and meager development in a state 
of nature. Man has precisely this power of consciously 
modifying the natural and artificial elements of his environ- 
ment, and this poAver continually enlarges. 

So, when we ask if economics deals with natural laws, we 
really ask whether this being, whose activity in a certain line 
we are studying, is governed by such laws. If we mean by 
this to ask whether his action is characterized by absolutely 
invariable habits, like the forces of j)hysics, we must plainly 
answer, no. If man had no power of initiative, or, on the 
other hand, were so perfectly rational as to always do the 
wisest thing, there would be a regularity in liis action which 
might perhaps form the basis of a complicated, but exact, 
science. As it is, all social sciences are approximate and 
partly descriptive. There is much in man's action which is 
exceedingly (though not perfectly) regular, and hence we 
have general, though apparently not invariable, laws. There 
is a part of his action, however, that seems as yet to be 
capricious, and we can only make note of it till we have 
more knowledge. The laws of economics are not compara- 
ble to the laws of inanimate nature in invariability, but they 
are of very general applicability, and are wholly in line with 
the action and intent of nature, and are, in this sense, " natu- 
ral." But the laws of economics are not natural laws in the 



The Natuke of the Subject of Economic Study. 79 

sense in Avhich the word is often used, namely, laws, exter- 
nal to man and not at all the product of man. The laws of 
economics have been designated as social laws to distinguish 
them from those of physical science. Social laws describe 
tendencies, or regularities, which appear especially in the 
consideration of large masses of facts. Human mortality 
serves as an illustration. When and how a certain man, as 
A, will die is proverbially uncertain; but when we speak of 
hundreds of thousands of lives we can predict with such an 
approximation of accuracy that a vast business-like life insur- 
ance can be built upon the regularity of the action of death. 
The importance of this question will appear later in consid- 
erhig the history of the development of economics. 

The foregoing discussion enables us to answer in a word 
the much-mooted question, " Is economics a science ? " It is 
not an exact or mathematical science, though certain portions 
of the subject may possibly become so. It is an approxi- 
mate and partially descriptive science, like all sciences deal- 
ing with man, or even with life. The inexactness of the 
social sciences is due to the very thing which gives them 
their supreme value, the nature of man and the greatness of 
their subject. 



80 OiTTLi^ES OF Economics. 

SUMMARY. 

The study of economic history emphasizes the following facts as the basis 
of economic science : 

L Man must be regarded primarily as a consumer if his true dignity is 
to be maintained. 

2. The recognition of a social class existing simply for the sake of pro- 
duction has tended to a wrong organization of society and a wrong concep- 
tion of economic science. 

3. Economic progress has been a progress toward interdependence, toward 
social as contrasted with isolated activity. 

4. The conditions of economic life are constantly changing, and conclusions 
based upon them are only relative. 

5. Economics maybe studied as a static or a dynamic science, each having 
its value, but needing o be clearly distinguished from the other. 

6. The laws with which economics deals are not invariable, like those of 
physics and ►chemistry, because of the interplay of the human will, which 
has the power of independent initiative. 

7. Economics is therefore a science, but not an exact science. 

8. Man's power of consciously modifying his environment is the basis of 
artificial as opposed to natural selection. 

QUESTIONS. 

1. "What is the necessity of making man rather than goods the prominent 
thing in economic science ? 

2. What ultimately determines whether a man is poor or not? What 
kinds of poverty are there? 

3. What is meant by " dear labor ? " Is it a good or a bad thing for so- 
ciety in general, and why? for employers in general, and why? for an indi- 
vidual employer, and why ? 

4. How far is independence a good thing ? dependence ? Are the two 
compatible? 

5. What is a static science? a dynamic science? What is the advantage of 
each ? What mistake are we apt to make in considering a science statically ? 

G. What is the difference between natural and civil law ? How do the 
laws of inanimate nature differ from those governing life? 

1. What is the diflference between an exact and a descriptive science? 

8. What is meant by natural selection ? by artificial selection ? Which 
applies to human society? Why? 

LITERATUKE. 

Sidgwick, Henry: The Scope and Method of Economic Science. 
Keynes, J. IST. : Tlie Scope and Method of Political Economy. 
Ingram, J. K. : A History of Political Economy. Chapter YII. 



CHAPTER XI. 

DEFINITION OF ECONOMICS AND ITS RELATION TO THE 
OTHER SOCIAL SCIENCES. 

We have necessarily anticipated, little by little, most of 
the elements needed to define economics, but we need to 
collect and formulate them as exactly as possible. Especially 
do we need to see clearly the relation between economics and 
its sister sciences. 

Man has been busy from the first in several lines of effort. 
He has talked, worshiped, fought, studied, etc., and each of 
these lines of effort has developed its own faculties and 
institutions. For convenience we may arrange these in eight 
groups, as follows: language, art, education, religion, family 
life, society life, political life, economic life. Each of these 
is the subject of a science more or less developed. The 
group of society life — that is, the life of polite society, calls, 
parties, balls, etc., has been studied but little, and we know 
few of its governing principles.* Language, on the other 
hand, is a science which has attained to very complete de- 
velopment. The rest lie scattered between these extremes. 

A peculiar feature of these activities is that they are all of 
them collective activities, activities which one man cannot 
well carry on alone. This is obviously true of family and 
political life, language, and others, and on careful examina- 
tion it proves to be true of the rest. It is now admitted, 
after many experiments, that art and even religion do not 
thrive in solitude. It would seem that if a man could do 

* An attempt to examine scientifically some, at least, of tlie plienomena of 
polite society has been made by a learned jurist, tlie late Professor Rudolph 
von Ihering, in his Zweck im Recht, a work which should receive more 
attention from American and English scholars than tliey have heretofore 
accorded it. 



8^ Outlines of Economics. 

anything by himself it would be to get a living; but our 
brief study of history impresses us with the insignificance of 
all such effort and the inevitable tendency of men to drift 
together in their economic activity. If it were possible for 
men to live in isolation we may safely assert that in such 
isolation every one of the eight lines of effort we have men- 
tioned would soon dwindle into insignificance or altogether 
cease. So these sciences are all of them social sciences; and 
as the sciences that deal with life are now grouped together 
under the name biology (science of life), so the social sciences 
are now grouped under the title of sociology, or the science 
of society. It must be remembered, then, that sociology is 
a comprehensive science, or rather a group of sciences. 

Economics is a branch of sociology. Next to language it 
is the best developed of them all, and is by far the best 
introduction to the larger grouj). Sociology as a coordinat- 
ing science is in a most undeveloped condition, and must 
remain so till much painstaking work is done in each of its 
branches. Economics may be defined as the science of those 
social phenomena to lohich the wealth- getting and loealth- 
using activity of man gives rise. This wealth-getting activ- 
ity is called economic. We may speak of it in all its rela- 
tions as economic life, or economy. We may thus say that 
economics is the science which deals with the economic 
life, or the economy of man. A useful distinction in lan- 
guage is thus made between economy, the life itself, and 
economics, the science dealing with that life. If this dis- 
tinction could always be observed much confusion would be 
avoided. 

We have economies of various sorts: the economy of an 
individual, of a family, a tribe, a city, a state, or a nation, 
and we have, correspondingly, many economic units. The 
dominant unit in ancient Greece, for example, was the house- 
hold, which included the family and all the slaves and other 
dependents. These lived together and formed a little group 
by themselves. The economic life of Greece meant, largely, 
a sum of the economic activities of these households, each of 



Definition of Economics. 83 

wliich strove to be sufficient unto itself. It is interesting to 
know that many a well-managed Southern plantation before 
the late civil war endeavored to produce all the means of 
life on the plantation, and in this respect, as in others, 
resembled a Greek household. But as time has progressed 
these old groups have been partially dissolved, and in many 
instances in modern times the individual, in his economic 
activity, constitutes a unit, although the family is still the 
prevalent economic unit. It is a natural outcome of industrial 
progress, as already explained, that the relations between 
these units have multiplied indefinitely in number and in 
importance. This is simply another way of describing the 
growing interdependence of men. Economics deals espe- 
cially with the mutual relations of economies of all kinds, 
private and public. It is chiefly, if not exclusively, a science 
of human relations, and without these relations could not exist. 

We are already prepared for the discovery that these dif- 
ferent activities of which we have spoken cannot be wholly 
separated from one another either in theory or in practice. 
We have noticed the bearing of legislation on economic life; 
but legislation belongs primarily to the science of politics, not 
to economics. If we had studied the history of Russia we 
should have found that the number of saints' days is so 
great as to hinder industry seriously; but these belong pri- 
marily to the subject of religion. The dependence of eco- 
nomic life upon such institutions as the family, education, 
etc., is too apparent to need illustration. Hence our defini- 
tion must be somewhat broadened, as follows: Economics is 
the science (1) lohich treats of those social phenomena due to 
the wealth-getting and 'wealth-using activity of man, and (2) 
lohich deeds with all other branches of his life in so far as 
they affect his social activity in this respect. Of course the 
other social sciences require a similar extension, and so they 
all are dependent upon economics. 

The Principal Divisions of Economics.— Economics 
in this work will be presented under two main heads, Private 
and Public. 



84 Outlines of Economics. 

1. Private Economics treats of the economic life of individ- 
uals and private combinations. It is not to be understood 
that this economic life is isolated, for such scarcely exists. 
The individual, whether single ^r in association, is still con- 
sidered in his relations to society. The distinguishing char- 
acteristic of this economy is that it is under the control of 
private persons subject only to such general regulations as 
the government may prescribe for the protection of the gen- 
eral interests of society. 

2. Public Economics. This branch of economics corre- 
sponds to some extent, but not wholly, to the economic politics 
or practical economics of the Germans. It treats of the 
economic life of man as manifested in the activity of the 
State.* In this we have to do both with the intervention of 
the State in private industries and with that economic activity 
which is carried on exclusively under its direction. Such 
are taxation in its various forms, the management of State 
property, the appropriation of State revenues, and the man-, 
agement of monopolies owned by the municipality or the 
State. This branch of economics naturally increases in im- 
portance as the functions of the State are enlarged, and it 
is now attracting great attention, f 

Private economics is again divided into four departments, 
production^ distribution , transfer of goods, and consumption. 
Production is the creation of utilities ; distribution is the 
dividing of the product thus created among the different 
factors of production ; that is, among those different persons 

*It will be observed that "State" is used here in the generic sense cor- 
responding to the original meaning of "political." It includes the activity 
of local political units, the commonwealth, and the nation. 

f On some accounts it would be better to entitle the two main divisions 
Social Economios and Political Economics, in which case "political" would 
be used in its true meaning, referring to the State. Social economics in the 
broadest sense would, however, naturally include political economics, for 
society is larger than government, and includes all its activity within itself. 
It would, therefore, not be an absolutely correct arrangement, if reference 
is had to the strict meaning of the terms. It is, however, frequently neces- 
sary to restrict technical terras more or less arbitrarily. 



Definition of Economics. 85 

or elements wliich have combined to produce it; transfer of 
goods is explained by the words, meaning their transfer from 
one person to another, usually in form of exchange ; con- 
sumption is the use made of goods, not always a using up, 
but the process in which goods serve their final purpose and 
for which they exist. 
7 



Outlines of Economics. 



SUMMARY. 

1. The different groups of men's social activities correspond to as many- 
social sciences which collectively constitute sociology or the science of society. 

2. Economics is the branch of sociology which treats of those social phe- 
nomena to which the wealth-getting and wealth-using activity of men gives 
rise. 

3. Economics deals with all other social activities in so far as they affect 
economic activity. 

4. Private economics treats of the economic life of individuals and private 
combinations. 

5. Public economics treats of the economic life of the State, not only in 
its independent activities but in its connection with individual enterprise. 

6. Private economics is divided into production, distribution, transfer of 
goods, and consumption. 

QUESTIONS. 

1. Into what groups have men's social activities been divided? Why? 

2. What is the group with which economics deals ? Does it have any- 
thing to do with the other groups? How much? Why? 

3. What have these groups in common ? What is the relation of eco- 
nomics to sociology? 

LITERATURE. 

Giddings, F. H. : The Sociological Character of Political Economy. (Pub- 
lications of American Economic Association. Vol. Ill, p. 29.) 

Roscher, W. : Political Economy. (Lalor's Translation.) Introduction, 
Cliapter II. 



BOOK II. 



PRIVATE ECONOMICS. 



PART I. 

PRODUCTION. 



CHAPTER I. 

INTRODUCTORY. 

We have defined private economics as that portion of the 
science which deals with private enterprise; that is, with the 
economic activities of individuals left to themselves. Of course 
no individual in a civilized country is left to himself entirely. 
Society, through the organization of government and other- 
wise, always controls the individual to some extent, but in 
the great majority of cases he is left to his own devices ex- 
cept for certain general rules. What these rules should be 
we shall consider under public economics, as well as certain 
cases in which private enterprise has to be altogether dis- 
pensed with. What we have now to consider is not the case 
of enterprises which are wholly private, for tliere are none 
such, but rather the private side of economic activities. The 
line is not easy to draw, but it is very important to con- 
sider the relation between these two functions. This is the 
most important economic question of our daj^ 

Utilities.— Man creates no nevf matter. Neither the farm- 
er nor the merchant adds one atom to the existing material 
of the earth. Yet they are both properly called producers. 
What do they produce ? Sim]3ly quantities of utilitj^ And 
how do they produce quantities of utilities ? Simply by put- 
ting things in their proper places. Man can only move 
things, and when he moves them in a suitable manner he cre- 
ates utilities. " This one operation," says John Stuart Mill, 
" of putting things into fit places for being acted upon by 



90 Outlines of Economics. 

their own internal forces and by tliose residing in other nat- 
ural objects is all that man does or can do with matter." * 

It has seemed to some that the farmer is more truly a pro- 
ducer than the manufacturer, and the manufacturer than the 
merchant; but such is not at all the case. All of these in- 
dustrial classes do the same thing. They produce utilities 
by putting things into the right places. The farmer adds 
nothing to the material of the globe, but he gives direction 
to the forces of nature so that existing material becomes better 
adapted to the wants of man, and thereby more useful. He 
drops corn into the earth, and thereby puts it into a fit place 
for being acted upon by external natural forces. From time 
to time he removes weeds and throws earth about the stalk 
which grows up, and portions of earth, air, and moisture take 
new relative positions, and the result is again corn, and more 
corn. Changed places and natural forces have rendered 
things more useful. All this while man has done nothing 
but put things in fit places. 

The manufacturer changes forms and combinations of raw 
material by putting things into fit places, and likewise pro- 
duces utilities. The merchant similarly takes things from 
places where they are less useful to places where they are 
more useful. He produces utilities as truly as the farmer or 
manufacturer. It may well happen that the utilities pro- 
duced by the merchant could be produced with a smaller ex- 
penditure of economic force, and that by a better organization 
of the factors of production saving could be secured; or it 
may be that at times the merchant has been able to secure 
a larger return for the j)roduction of a given quantity of 
social utility than the farmer; but all this is no justification 
whatever for the popular impression that he is less ^^roduc- 
tive than any other person who is engaged in economic work. 

Production, then, means the creation of utilities by the 
application of man's mental and physical powers to the phys- 
ical universe, which furnishes materials and forces. This 
application of man's powers is called labor. 

* Political Economy^ book i, chap, i, § 2. 



Introductoky. 91 

Those quantities of utility wliich result from labor are 
called economic goods; but not all economic goods are the 
result of labor. Economic goods have not been defined thus 
far, but they have been described as material good things. 
Probably any reader of this book would call a vacant lot on 
Fifth Avenue in New York city a material good thing, even 
if no person has ever expended a day's labor on it. It is de- 
sirable at this point to have a clear idea of economic goods, 
and a definition is offered. We will begin with the word 
'' good." Everything which satisfies a human want we call 
a good; and here, on the threshold of our science, we see 
how absurd it is to say that economic laws are independent 
of man and would be what they are if man did not live 
on the enrth. We cannot get half way through our defini- 
tion of economic goods before we have brought in the human 
element. 

Goods we divide into free goods and economic goods. 
Free goods are those which exist in superabundance and are 
offered freely to every one without charge. Air and water 
are usually free goods. Land in a new country is frequently 
a free good. 

JEconomiG goods are those goods lohicJi are usually and 
regidarly obtained by man only by exertion^ and lohich, or 
the use of which, may be disposed of for other goods. They 
may be further characterized as directly or indirectly ex- 
changeable for all goods which come on the market. After 
money comes into use tliey may be defined as goods which 
exchange for money or as goods which are bought and sold. 

A few points require further explanation. " Usually " they 
are obtained by exertion. One may pick up a diamond or a 
nugget of gold upon which one has stumbled. Mere picking 
up of these articles cannot properly be called labor. 

Man's Original and Acquired Powers. — The goods or 
their use may be disposed of for other goods. This enables 
us to include in our definition both material and immaterial 
goods, like a person's technical skill acquired by labor, and 
often very productive. The central point of our science is 



92 Outlines of Economics. 

the conception of man in his relations to material good things; 
but it does not seem practicable to exclude utilities fixed 
and embodied in human beings from the rank of economic 
goods because man cannot be bought and sold. Once men 
could be bought and sold, and they then took their place 
with horses and oxen among material goods. Now man may- 
sell the use of his powers. It is hard to draw the line, but it 
may be done with sufficient accuracy by keeping in mind our 
central conception. We would not speak of the cultivation 
of our faculties, merely for the sake of our own better devel- 
opment, as economic exertion in any strict sense, although it 
might well have economic consequences. The economic life 
and its goods are subservient to man. We call the acquisi- 
tion of a technical skill an economic process, because it has 
reference to the creation of utilities incorporated in material 
good things. The direct labor expended on matter we may 
call a primary economic process, and that labor which pre- 
pares us to expend our augmented power on material things 
to render them useful, or more useful, we may call a second- 
ary economic process. There is a production where economic 
exertions and non-economic exertions meet, as in the com- 
mon school education of the young. There are such border 
lines, where discrimination is difficult or impossible, in natu- 
ral sciences as well as in social and mental sciences, but they 
need not, as a rule, occasion much difficulty. 

Wealth. — Political economists have usually called eco- 
nomic goods wealth. This term is not wholly satisfactory, 
on account of the many uses to which the word has been put. 
It commonly means abundance of economic goods, either 
absolutely, in proportion to one's wants, or, as is more fre- 
quently the case, relatively, with reference to the possessions 
of others. Wealth is also used often to denote the economic 
goods belonging to an organized society of men, especially 
of a nation. We compare the wealth of England with the 
wealth of France or Germany. We would hardly say Ger- 
many is not a wealthy country, but, rather, not a rich coun- 
try. Notwithstanding the ambiguity, wealth has so gener- 



Intkodttctory. 93 

ally been used for economic goods, and is so convenient a 
term, so much more so than the larger term of two words, 
that it may not be possible, perhaj^s not even desirable, to 
displace it entirely. The two terms can be used interchange- 
ably in many cases, care being taken to employ economic 
goods wherever it will make our meaning clearer or help to 
avoid misunderstanding. 

The Individnal and Society.— One distinction runs all 
the way through political economy, and that is the distinc- 
tion between tlie social and the individual standpoint. We 
have consequently to distinguish between social and individ- 
ual wealth, for what is wealth to the individual is often not 
wealth to society. 

Many illustrations offer themselves. A mortgage is indi- 
vidual wealth. If the claim it stands for is extinguished 
society is neither richer nor poorer. Similarly all State, 
municipal, and federal bonds represent claims on the indus- 
try of the people. If all these bonds should be destroyed 
the bondholders as individuals would suffer loss, but so- 
ciety as a whole would be neither richer nor poorer, and 
society, exclusive of bondholders, would have gained at their 
expense. 

Census Estimates of Wealth. — Census returns of 
wealth, from their very nature, give little idea of the eco- 
nomic well-being of the country. First, census returns are 
made in money. Now, it is a well-known fact that prices 
vary greatly according to the amount of money in circula- 
tion. If the amount of currency is increased, prices rise, 
and the returns show an increase in valuation when perhaps 
there is no real increase of commodities. Plainly such an 
increase of wealth on paper means no real advantage to the 
country. Second, an article may be so increased in amount 
that its value may be reduced in even greater amount. Thus 
a very abundant wheat crop may reduce the price so low 
that the wdiole crop sells for less than a poor crop. The 
cotton crop of 1869, for example, amounted to 1,129,811,645 
pounds, with a farm value of $303,600,000, or a little over 



94 Outlines of Economics. 

26 cents per pound. Two years later the crop had increased 
to 2,020,693,736 pounds, but the total farm value was only 
$288,300,000, or a little over 14 cents per pound. Thus while 
the amount of the crop had increased 890,000,000 pounds, 
or nearly 79 per cent, the total farm value had deceased 
over $15,000,000.* Third, the value of things is greatly 
affected by the arbitrary disposition of society. When 
law gives valuable privileges to a company there is an 
immense increase of value in that company's plant but 
no increase in social well-being; perhaps even a positive 
decrease, for property is often rendered less serviceable 
by such a disposition. When we congratulate ourselves 
on having more wealth than a country like Prussia we must 
remember that there the immense property of telegraph and 
railway lines represents cost, while with us it represents sev- 
eral times the cost on account of the peculiar privileges we 
have granted to such enterprises. Economic well-being, on 
the other hand, depends upon the abundance of economic 
goods, their adnptation to the satisfaction of wants, and on 
the importance of the wants which they satisfy. Increase 
in valuation may mean nothing but increased abuse in the 
management of the nation's goods. 

Take our own post office. It can figure in census re- 
turns only for the actual value of its plant, while if it should 
be made over to a private corporation it would soon have a 
capitalization of hundreds of millions of dollars. Apparently 
the wealth of the country would be increased, but really we 
would be poorer, for we should be obliged to support many 
highly paid officials and costly attorneys, and an expensive 
and demoralizing lobby to shape post office legislation for 
private ends. 

Most countries have granted limited charters to gas com- 
panies, street-car corporations, steam railway companies, and 
the like. Yery often, at the expiration of a given period, as 
thirty, fifty, or ninety years, the entire property, without rec- 

* Statistical Abstract of the United States, Eleventh Number (1888), 
page 136. 



Introductory. 95 

ompeDse, passes over to the people and becomes public, like 
our post office. This is the case with street cars in Glasgow, 
Scotland, and Berlin, Germany, and steam railways in France 
and Austria. Elsewhere the right is reserved to purchase 
property at the expiration of a prescribed j)eriod, paying for 
the plant only at an appraised valuation, giving nothing for 
the franchise. This prevents an inflation of values, but en- 
riches a country. 

The results of the household work of women do not ap- 
pear in the census returns, and yet they include a large part 
cf the utilities created every year in a country. If bread 
should universally come to be baked outside the home it 
would increase the wealth of the country as reported in the 
census returns. 

Yarious Kinds of Production. — We have isolated 
production and social production, domestic production and 
production of economic goods for exchanges. Isolated pro- 
duction is found only in the earliest stages of human devel- 
opment, and even then it is not isolated in the strictest sense 
of the term. Even the beasts of the field are not altogether 
isolated in their efforts to obtain food, although they differ 
considerably among themselves in this respect. While we 
do not find individuals living a strictly isolated economic 
life we do discover families or households organized as iso- 
lated economic units. We find in history, and we discover 
in the records of travelers, a relatively isolated economic ac- 
tivity. Products are gathered from nature, and these are 
used to satisfy the wants of the various members of this 
economic unit. But as time goes on, the greater part of 
what is produced in industrial centers is destined for the 
consumption of others, and the production of to-day is chiefly 
social. Men produce for one another. Domestic production, 
production in and for the household, is distinguished from pro- 
duction for exchange even in present industrial civilization. 

We have also individual and social production in a sense 
just described in this chapter. Individual production is 
sometimes social destruction of economic goods. A proprie- 



96 Outlines of Economics. 

tor of a lottery may produce things valuable to him and ac- 
quire wealth, while his activity is from a social standpoint 
pestiferous. The same thing may be said of the class of 
saloon-keepers and of all those unhappy wretches who minis- 
ter to vice. We have also the familiar terms of production on 
a large scale and on a small scale, well enough understood. 

Overproduction and Underconsumption. — The pur- 
pose of production is consumption, and if more is produced 
more must be consumed. Power to consume is measured 
by purchasing power, and power of consumption sets a 
limit to production. There is no such thing as general over- X! 
production, for more economic goods of all kinds have never 
been produced than men really need to satisfy their legiti- 
mate wants. On the contrary, not enough has ever yet been 
produced for this purpose. Sometimes production does not 
go forward evenly, and there is an undue amount of labor 
and capital directed to certain pursuits; but until all men are 
well clothed, housed, and fed, and furnished with material 
appliances for their higher life, like books, pictures, musical 
instruments, church buildings, etc., it will be a manifest ab- 
surdity to talk about a general overproduction. When 
there is almost universal difficulty in disposing of goods pro- 
duced the real phenomenon is described by underconsump- 
tion. Men want these goods; they are willing to give serv- 
ices in exchange for them, but they cannot dispose of their 
services, and consequently they lack purchasing power. A 
glut in the market alwaj^s means underconsumption. This 
is one of the sad and curious features of the life of the mod- 
ern socio-economic organism. Its parts do not always fulfill 
their functions harmoniously; frequently parts are partially 
incapacitated and the body is in a diseased condition. 

Some have supposed that luxury and extravagance are 
able to remedy gluts in the markets, but this is impossible. 
On the contrary, they frequently bring about a diseased, 
condition of industrial society which leads to gluts. We 
shall consider this subject at greater length when we come 
to consumption. 



Introductoky. 97 

The Relation of Prodnction to Other Departments 
of Economics. — Production in its broadest sense includes 
the greatest part of all the branches of private economics ex- 
cept consumption. We have seen that all man can do is to 
change the place of things. He puts things together in new 
relations, and new things result. But the process of exchange, 
which includes transportation, etc., is plainly only a part of 
this process. It looks very strange at first to think of a mer- 
chant as a manufacturer, but when we remember that he sub- 
divides things which are too bulky for use we see at least a 
suggestion of the manufacturer's function. On the other 
hand, does not the man who puts a spoke into a wagon wheel 
do much the same thing as the one who puts the wagon into the 
place where it is to finally serve its purpose ? To a certain ex- 
tent also distribution, or the sharing of a good among several 
persons who have contributed to its production, is an insepara- 
ble part of our present system of production, though the con- 
nection here is not quite so absolute or quite so apparent. In 
a primitive condition of society, however, distribution was not 
separate and distinct from production. What a man pro- 
duced, that he had as his share of the total wealth produced; 
it was his income. Public economics also, the part played 
by the State in economic life, is largely a direct factor in 
production. The remainder has to do with consumption'. 
We are thus led to conclude that the most essential division 
of economic activities from one standpoint is that of pro- 
duction and consumption, which are natural correlatives. 
But the branch processes of transfers and distribution are so 
important, so peculiar, and have so long received separate 
treatment, that it is every way more expedient to keep them 
coordinate with the others. 



98 Outlines of Economics. 

SUMMARY. 

1. Man cannot create matter, but can change its place. When this is 
done so as to create utilities we call it production. 

2. All parts of the process of preparing things for man's use — agriculture, 
manufacture, transportation, etc., are alike productive. 

3. A good is anything which satisfies a want; an economic good is one 
which may be regularly had for exchange. 

4. Men have been excluded from the exchange market, but their labor and, 
in a way, their skill are still bought and sold, and so are economic goods. 

5. Wealth often means, in economics, not an abundance but simply an 
aggregate of economic goods. 

6. Individual wealth is not necessarily wealth to society. 

I. Census estimates of wealth are a most imperfect index of well-being, 
among other things, on account of the fluctuating values of money and of 
goods. 

8. Domestic production does not appear in these estimates. 

9. In almost all cases production is a social process. 

10. What is usually called overproduction is really underconsumption 
due to bad distribution. 

II. A large part of both distribution and transfer might be treated as 
a subordinate part of production, but they are coordinated with production 
and consumption for convenience. 

QUESTIONS. 

1. What is production? How much does it include? 

2. What is a good? What is the difference between a good and a thing? 
What is an economic good? 

3. Why are not men classed as economic goods ? Why are horses so 
classed ? Is there any inherent difference between the two from the eco- 
nomic standpoint? 

4. What different meanings of wealth ? What is the economic meaning ? 

5. What is the difference between individual and social wealth ? 

6. Why can we not tell by census reports of wealth whether the country 
is " well off" or not? Why is domestic production not considered ? • 

1. Define overproduction. Why is it generally misunderstood ? 
8. What is the relation between production and the other branches of 
private economics ? 

LITERATURE. 

Any of the standard works on political economy, as J. S. Mill's, F. A. 
Walker's, or Marshall's, treats of the subjects discussed in this and the fol- 
lowing chapters on Production. On the productivity of commerce and the 
erroneous opinion that agriculture alone is production, see Chapter lY in 
Ely's Problems of To-Day. 



. CHAPTER II. 

THE FACTORS OF PRODUCTION. 

There are three factors of production, of which two, 
nature and labor, are primary, and the third, capital, is 
secondary. We will consider these briefly in the order 
named. 

1. Nature. — We include under nature all natural forces 
used, as the wind, the movement of water, attraction of 
gravitation, cohesion, etc. Many of these things fur- 
nished by nature are free goods and not economic goods. 
Nature, economically considered, is generally called simply 
land, because, of what belongs to external nature, it is with 
land that we have principally to do in political economy. It 
must, however, be observed that land has a very broad mean- 
ing, and includes what is below the surface of the earth, and 
water so far as it is appropriated by private parties or public 
bodies like cities ; also in some respects the entire surface of 
the earth. This factor is in early stages generally common 
property, but in later stages of life it has been private prop- 
erty, and a return for its use has been secured by private 
individuals, or, in cases, by the public when owned by the 
public and leased to private parties. The return which land 
in itself, apart from capital or labor, yields is called rent. 
This is pure rent, or economic rent, which is different from 
rent as ordinarily understood, for rent in popular usage in- 
cludes recompense for the other factors of production. Pure 
rent can best be observed in cities, where it is the annual 
value of lots on which buildings stand. A large portion of 
the land of Baltimore, Philadelphia, and London is owned by 
men who do not own the buildings and other improvements 
but receive from owners of improvements an annual rent. 



100 Outlines OF Economics. 

Land renders three services to production : First, it gives a 
" standing place." It is something on which we can rest and 
move about while conducting productive processes. Mere 
space in itself is often extremely valuable, as can be seen in 
the case of city real estate ; and as population is rapidly 
growing, and as a continually increasing proportion of the 
population dwells in cities, this service is constantly becom- 
ing more important, and the return in rent will probably 
augment rapidly for a long time to come. Second, land 
contains the elements needed by plant life, and thus serves 
agriculture. We call this property of the soil its fertility. 
Third, land contains natural products below the surface of 
the soil, like coal, natural gas, petroleum, iron, gold, silver, 
and other metals. These are the natural treasures of the 
earth. Man does not create them nor give direction to 
nature in their formation. It has seemed to some nations 
unfair that these natural treasures should become the prop- 
erty of individuals, and they have treated them as a common 
heritage, exacting a rent or royalty for the opportunity to 
appropriate them. This is perhaps generally the case on the 
continent of Europe, but English law, with its inclination to 
the exaggeration of private rights, established the principle 
that he who owns the surface owns to the center of the earth, 
and upward to the sky. It is a peculiarity of land that its 
quantity cannot be increased appreciably, and thus it is 
spoken of as a natural monopoly. This seems hardly accu- 
rate. It is a limited factor, but in the ownership or manage- 
ment of land there is no inevitable tendency to monopoly. 

2. Labor. — Labor is the second of the two primary things 
in production. It is here used in a broad sense, and includes 
all the capacities of every sort, intellectual as well as phys- 
ical, in man which have economic significance. We might 
perhaps, on some accounts, better substitute man for labor 
as the second factor. 

It is service supplied by human beings, and is different from 
other goods because it is always connected with a personality. 
Moral and intellectual qualities increase its productiveness., 



The Factoes of PKODrcTioN. 101 

Temperance, trustworthiness, skill, alertness, quick percep- 
tion, a comprehensive mental grasp — all these and other good 
qualities belonging to the soul of man are of chief impor- 
tance in man. Man's mere physical strength in itself is a 
poor thing, being surpassed by that of lower animals, as 
oxen and horses ; but man is far more productive, and even 
as a slave sold for far more than the lower animals. The 
economic value of intellectual training is generally not suffi- 
ciently appreciated. It has been ascertained that, with no 
noteworthy exceptions, the higher in any part of the United 
States the per capita expenditure for schools the higher is the 
average of wages, and the larger, consequently, the produc- 
tion of wealth. 

Growth of Population. — The supply of labor is increased 
with the growth of population, and to this there is no limit 
save the means of subsistence. Fear has been expressed that 
the growth of population may outrun the means of subsist- 
ence. A theory of population has been advanced by the 
English economist, Malthus, which is called Malthusianism. 
It is simply this : population tends to increase as 2, 4, 8, 16, 
32, etc., or in geometrical progression, while the best we can 
hope is that food supply will increase as 2, 4, 6, 8, 10, etc., 
or in arithmetical progression ; consequently, if there were 
no check to the natural increase of population men would in 
a short time starve to death. But there are checks to the 
growth of population, and these are of two kinds, namely, 
positive and preventive. Positive checks are those which 
keep down population by killing off people, like plagues, 
pestilence, intemperance, vice, crime, war. Preventive checks 
are those which keep down population by preventing the 
birth of an undue number of people, as prudence in con- 
tracting marriage or abstinence from marriage. These are 
checks of a moral character. Men who are conscientious will 
not marry until they feel that they will probably be able to 
support a wife and bring up children worthily. As poj^ula- 
tion becomes denser this postpones marriage, and as the age 
of marriage increases the average number of births will 



102 Outlines of Economics. 

decrease. Innumerable customs exist all over the world, 
especially in older countries, postponing the age of marriage, 
and these tend to prevent an undue growth of population. 
The only practical conclusion which Malthus drew from his 
doctrine was this : let no one marry until he has a reasonable 
prospect that he will be able to support and bring up a family 
of the average size. He wished to intensify the feeling of 
parental responsibility. 

At the present time nothing more in the way of restraint 
to population seems necessary in the United States than to 
keep from our shores the lowest classes of foreigners, and to 
exercise in contracting marriage that prudence which has 
long characterized the really best classes of American society. 
Nevertheless, it must be admitted that by no human possi- 
bility can population long continue to increase in the United 
States as it has done in the past, for in a comparatively short 
period there would not be standing-room on the surface of 
the earth for all the people. It is said that our population is 
now doubling in less than twenty-five years. If it continues 
to increase at this rate we have a geometrical progression. 
Let us suppose it is now sixty millions and that it doubles 
once in twenty-five years. Two hundred and fifty jears is a 
short period in the world's history, but our population at the 
expiration of that period would exceed sixty thousand mil- 
lions of people, which is forty times the estimated population 
of the globe at present. 

How momentous a thing a geometrical progression is in 
* such a case has been shown more clearly still. Let us sup- 
pose that there are only two people on the face of the earth, 
and that population doubles only once in fifty years. At 
the expiration of three thousand years the whole surface of 
the earth, land, and sea would be covered with people piled 
one on top of the other eiglit hundred deep.* 

Manifestly the present rapid rate of increase of population 
cannot continue forever; yet it does not cause great uneasi- 
ness. It has been urged by some writers that as man de- 
* Marshall's Economics of Industry, chap. v. 



The Factors of Production. 103 

velops more highly his fecundity will decrease and the growth 
of population will become slower. Others think that pru- 
dential and moral restraints will be ample to prevent an 
undue increase of population. 

The chief cause for anxiety is this: For some reason or 
another it seems to be more difficult for a large population 
to live peaceably together under present industrial conditions 
than for a small one, and there is ground for the anticipation 
that the growth of population will test the worthiness of our 
civilization to endure, as other causes have tested older civili- 
zations. We may be sure that if there is a moral governor 
of the universe modern nations, like ancient nations, will be 
called upon to show their fitness to survive. Every time the 
sun rises it looks upon a larger population than ever before 
in the United States, and consequently upon a more comj^lex 
industrial civilization. A force mighty, and it almost seems 
irresistible, is at work day and night, day and night, never 
ceasing, thrusting upon us more and more serious social prob- 
lems. These problems can never be solved by the police- 
man's club or the soldier's bullet, for this quiet on-moving 
force laughs such repression to scorn. Only righteousness 
can solve them, for only in righteousness is there power to 
enable us to adjust ourselves to our new environment. 

3. Capital. — Capital is the third factor in production. 
It is not one of the two first things in political economy, but 
it is a combination of these two. Land and labor together 
produce capital, just as oxygen and hydrogen combine and 
produce water. Capital is neither land nor labor, but, re- 
sulting from the two, it is a new thing and has properties 
of its own. Capital is eve7y product lohich is used or held 
for the pxLrpose of producing or acqtdring loealth. 

It is often said that capital is the result of saving, but this 
is misleading. Saving is merely a negative act and cannot 
produce any j^ositive result. We must have something to 
save; that is, we must first produce, and then over and above 
the necessities of life there must be a surplus; if this is in 
productive use, or held for production, it is capital. It is 



104 OurLiNEs OF Economics. 

to be noted that a simple surplus is not capital. If a man 
gathers food and necessaries for a year or for a lifetime, 
and then simply takes advantage of them to spend his time 
in idleness, it is clear that his accumulation serves no new 
purpose. It is wealth, but it is not capital. Supposing, fur- 
ther, that he lives on this accumulation and meanwhile 
makes machines or tools with which to assist the process of 
production. The accumulation on which he lives is still 
wealth rather than capital, for it is used primarily to satisfy 
the man's wants, not to produce machines. It is a great 
mistake to think of man only as a producing machine, and 
of the things which he consumes as capital spent for the sake 
of production. This view forgets that production exists for 
the sake of man, not man for the sake of production. It is 
a conception which degrades labor, as any conception does 
which forgets that the laborer is first of all a man, and that 
he eats for his own sake as much as a king. The real dis- 
tinction between capital and other goods is that capital is 
employed as an instrument to acquire wealth, not to satisfy 
human wants directly. When goods are used to satisfy hu- 
man wants directly they are rendering the ultimate service 
which goods can render, and to speak of them in such cases 
as employed in production is to forget the most important of 
all truths, that they are employed for the satisfaction of man. 

But, while the distinction between capital, or wealth-get- 
ting goods, and consumption goods is an easy one, it will be 
seen that two different conceptions are still included under 
the word capital. We may view capital from the standpoint 
of society or of the individual, and each standpoint gives us 
its own conception. These we may call social and individ- 
ual capital. 

Social Capital. — The most obvious way of getting wealth 
is to produce goods. This is the only way that society, as a 
whole, has of getting wealth. Individuals may grow rich at 
the expense of others, but this does not enrich society. Thus 
it is that social capital cannot be anything else than pro- 
ductive. Productive capital includes all goods used, not to 



The Factors of Production. 105 

satisfy wants directly, but to aid in the production of other 
goods. Every device, from the bow and arrow of the sav- 
age up to the steam engine of to-day, is of this sort, as well 
as such goods as wool, cotton, lumber, etc., commonly known 
as raw material. No one wants these goods for their own 
sake, but for the sake of what they will produce. It is here 
that we see the sio-nificance of savinaj;. Not that mere sav- 
ings are capital necessarily, but, by accumulating a surplus 
of subsistence goods, men are able to produce these devices 
which aid them in their work. Thus capital is rather the 
result of a special production than of simple saving. 

The assistance of productive capital is necessary to any 
production of economic goods except the most primitive 
and limited. It means buildings, tools, machinery, steam- 
ships, railways, telegraphs, telephones, manufacturing and 
commercial establishments. To spend each day in working 
for those things which will directly satisfy our wants is to 
live from hand to mouth in the most disastrous poverty. 
As society advances an increasing part of men's efforts are 
spent on goods which in themselves have no power to satisfy 
human wants, but which, in their further working, supply 
much more than man's direct efforts can furnish. 

Individual Capital. — While social capital is necessarily 
productive, and productive capital necessarily social, the 
same is not necessarily true of individual capital. Individual 
capital is means of the acquisition of wealth to the individ- 
ual, and the individual may acquire wealth by other means 
than production. Now, by far the greater part of capital 
owned by individuals is not only acquisitive but productive; 
such as factories, machines, etc. This we call social capital 
as well as individual capital. By individual capital we mean 
goods employed to get goods from other people as well as to 
produce goods. Food is used to furnish ultimate satisfaction 
to men, and thus is subsistence or consumption goods from 
the standpoint of society. We toil to get food, and that is 
the end of our economic efforts. But the individual may 
look upon the food of workmen merely as a means for the 



106 Outlines of Economics. 

acquisition of further wealth. He gains an income from it, 
and to him it is capital. He speaks of it as such. It is evi- 
dent that this wealth does not produce any further wealth, 
and so cannot be classed as social capital. It does serve, 
however, to enrich individuals, and so constitutes something 
which from the individual standpoint may be called capital. 
Thus we may say that any economic good, whatever, is cap- 
ital to the individual who holds it not for consumption, but 
for the purpose of gaining wealth by it. Shoes are capital 
to the shoedealer, but not to the man who wears them. From 
the social standpoint they are never capital. From the so- 
cial standpoint the question of capital is one of production ; 
from the individual standpoint it is primarily one of distri- 
bution. It may be unfortunate that capital has to be used 
to designate goods which do not produce and do not enrich 
society, but usage is so firmly established here that it is 
useless to protest. 

Representative Goods.— Still another class of goods, if 
they may be so called, must be distinguished from capital in 
the social sense, and, indeed, from social wealth, although 
they may be regarded as capital from the individual stand- 
point. We refer to what are known as representative goods, 
which, strictly speaking, are not goods at all but only signs 
of ownership, partial or complete. Such are notes, mort- 
gages, bonds, stock certificates, etc. Their nature will be 
clear on a moment's reflection. A mortgage is a conditional 
title to a piece of property. Its only value is the value of 
the property behind it. A certificate of stock is a title to an 
undivided portion of the property controlled by a corpora- 
tion. A government bond is a title to a certain portion of the 
nation's income which the government pledges itself to collect 
and deliver to the bondholder. It is characteristic of this 
class of "goods" that they are not goods, but that they 
represent goods, and by this characteristic they are easily dis- 
tinguished. They are not, to be recognized in estimates of 
social wealth. The individual may speak of his wealth or 
his capital as consisting of bonds and mortgages, but this is, 



The Factors of Pkodiiction. 107 

strictly speaking, only a figure of speech. It is as incorrect 
to suppose that these things actually constitute his wealth 
as to call wealth the figures of his notebook in which he has 
calculated its amount. 

Franchises are no part of social capital, they are simply 
permission to make use of existing social capital or to create 
social capital. The capital of society is not diminished when 
the value of corporate property, like railways, telegraphs, tele- 
phones, and the like is reduced to a fair valuation for the 
actual social capital invested. It may or may not be morally 
right, it may or may not be legally possible, to equalize in 
a concrete case social and individual capital; only the partic- 
ular circumstances surrounding that case can determine. It 
is now simply desired to bring out clearly the distinction. 

Fixed and Circulating Capital. — A common division 
of capital is into fixed and circulating. Circulating capital is 
capital which can be used only once, or in one round of oper- 
ations. Its entire value passes over into the product. Fixed 
capital, on the other hand, is capital Avhich lasts for a suc- 
cession of operations, and only a part of the value of which 
passes over into the product with each use. Coal used in a 
furnace is an example of circulating capital; the coal cart in 
which the coal is hauled is fixed capital. Of course the dif- 
ference is one of degree only. 

Capital Saved by Being Consumed. — Capital is as 
truly consumed as any other form of wealth, and exists only 
for that purpose. The only difference is that consumption 
in this case does not result in satisfaction of a human want but 
in the production of a new good into which passes the value 
of the capital consumed. The widespread impression that it 
is better for a m^an to spend his substance in riotous living 
than to save it rests in j^art U23on this truth. Wealth plainly 
does not perform its function when hoarded, and the popular 
objection to hoarding is certainly justified in part. Wealth 
is lost for the time being when it is simply hoarded. Only 
when it is employed can we call it truly saved. But while 
this is true it by no means follows that all using of wealth 



108 Outlines of Economics. 

is advantageous to the community. The man who uses his 
wealth in such a way that a hundred men are induced to 
work for a week in preparing a feast which goes in a night 
does not profit the community. That labor does not pro- 
duce anything which the community can enjoy, only a feast 
for a prodigal. The fact that he pays them for their work 
only means that he enables tbem to get a share of the com- 
munity's stock of goods, but he does nothing to increase that 
stock. We see, therefore, that it is the productive use of 
wealth, its use as capital, which benefits the community. 
Luxury and poverty have gone hand in hand all through 
human history. 

Increase of Capital. — Capital is a growth, and, as a re- 
turn is exacted for capital, capital begets capital, as it were. 
This makes it infinitely easier for a man who has capital to 
accumulate it than for a man who has no cnpital. Precisely 
the same is true of the community or nation. The posses- 
sion of large wealth in the form of capital means the posses- 
sion of large productive resources, and so the certainty of 
large returns in wealth. So intimately is present capital 
connected with past capital that it has been said that there is 
not a nail in all England which could not be traced back 
over eight hundred years to savings made before the Norman 
Conquest. 



The Factoks of Prodijctioi^. 109 

SUMMARY. 

1. Nature, meaning land and all it contains in its broadest sense, is the 
first factor in production. 

2. Land renders three services : it furnishes standing room, plant life, 
and mineral treasures. 

3. Labor is tlie second factor in production. 

4. The laboring population tends to increase more rapidly than tiie means 
of subsistence. 

5. This tendency is checked by positive checks which kill off people, 
and by preventive checks which postpone marriage and prevent births. 

6. A restriction upon undesirable emigration is a needed check at present 
in the United States. 

7. The difficulty of harmony in a crowded population is the most serious 
aspect of the problem. 

8. Capital is a third factor in production, derived from land and labor. 
It consists of products used to increase wealth. 

9. Capital is the result of a surplus in production which is saved, and 
which gives rise to a special production. 

10. Social capital consists of wealth used for further production. 

11. Individual capital consists of wealth used for further acquisition, 
either by production or by transfer. 

12. Representative goods are simple signs of ownership. 

13. Capital that is used up in one using is circulating capital; that w-hich 
may be used many times is fixed. 

14. Capital can be saved only by being consumed; to hoard it is to 
waste it. 

QUESTIONS. 

1. What do we mean by nature ? How much of nature is a " factor in 
production? " Define this term. 

2. What is meant by land ? What does it include ? What services does 
it render? 

3. What is rent ? What double meaning has the term ? 

4. What is the third factor ? What is its principal characteristic as con- 
trasted with land ? 

5. What is the Malthusian law? What are positive checks? preven- 
tive checks? What check does this country need to apply? Why this? 

6. What is capital? Its origin? Is food of laborers capital? If so, 
why ? If not, why not ? 

7. What is social capital? individual capital? Does either include the 
other, and if so, which ? 



110 Outlines of Economics. 

8. "What are representative goods? Are they wealth? Why? 

9. What is the difference between circulating and fixed capital ? Why is 
capital saved by being used up ? What is the advantage of owning capital ? 

LITERATURE. 

On capital, see Bohm-Bawerk's Positive Theory of Capital (Smart's Trans- 
lation), Books I and II. 

On population, see James Bonar's Malthus and His Worh, and J. S. Mills's 
Political Economy, Book I, Chapter X; also Herbert Spencer's Principles 
of Biology, Part VI, Chapter XII. 

On wasteful expenditure and saving, see Ely's Problems of To-Day, 
Chapter XL 



CHAPTER III. 

ORGANIZATION OF THE PRODUCTIVE FACTORS. 

Early Simplicity. — The organization of the factors of 
production, simple at first, becomes on the whole continually 
more complex with the development of industrial civilization. 
Diiferentiation accompanies development. The old house- 
hold economy is organized in such a manner that the exist- 
ence of three separate factors in production is scarcely per- 
ceived. The same man is owner of land, labor, and capital, 
and all the products flowing into his hand are distributed by 
him among those who participate in production according to 
the manner which he deems proper. When production is 
carried on by a village community w^e have collective owner- 
ship of the instruments, management by a common author- 
ity, and a division of products according to regulations based 
on custom. The products are not divided into parts corre- 
sponding to the factors of production, but the same man 
receives in every case wages, interest, rent, and jDrofits. It 
is, in fact, only recently, with a new organization of indus- 
try separating these factors and assigning them to d liferent 
industrial classes, that the factors of production have become 
commonly recognized as distinct either in production or in 
the distribution of products. Even to-day this separation is 
in a large portion of the industrial field not effected, and, 
consequently, there is not there that antagonism between 
classes elsewhere observed. The American farmer in our 
Northern States is usually landowner, capitalist, laborer, and 
manager, and receives rent, interest, wages, and profits, and 
in the total product cannot distinguish one from the other. 

The G-Tiilds. — The old guild organization of industry and 
commerce united the factors of production in the same man. 



112 Outlines of Economics. 

The guild of the Middle Ages embraced apprentice, journey- 
man, and master, and regulated industry and commerce 
under governmental supervision. The master managed the 
business, owned the capital, and worked with his own hands. 
He received the entire product of the business after support- 
ing the apprentices and paying his journeymen. Apprentices 
and journeymen were, it is true, workmen, and conflicts about 
wages arose not infrequently, although for long periods har- 
mony prevailed, jD^i'ticularly during the best days of the 
guilds. There was a partial separation of labor from other 
factors, it is true, but not complete, and the man who sup- 
plied labor looked forward not without reason to the time 
when he should become capitalist, employer, and manager. 
This advance was a regular part of the guild system. 

G-rowth of Complexity. — The present century has wit- 
nessed a great change in the organization of the productive 
factors, especially in commerce, manufactures, and transpor- 
tation. We have a large class that furnishes labor only, 
another class that furnishes land and capital, and a third 
class tliat organizes and manages the undertaking. A mod- 
ern railway corporation serves as a good illustration. Tlie 
stock and bondholders furnish capital on which they receive 
interest ; the stockholders carry on the business through 
managers, and for this service they hope to receive a sui'plus 
above interest, called profits ; labor is remunerated by wages 
and by salaries, wages being the remuneration of subordinates 
and salaries of officials. Land is supplied by owners of stock 
and bondholders, a part of their capital being exchanged for 
land, and consequently we have rent also, although not usually 
appearing as a separate factor. Yet land may appear as a 
separate factor when land is leased. IS'o doubt railways in 
Baltimore and Philadelphia pay ground rents, annual returns 
for land itself, to those who do not own the improvements. 
We observe, then, all these various classes, and perceive that 
the product or revenues of the undertaking are divided into 
a corresponding number of portions. It can readily be under- 
stood how controversy respecting portions allotted to the 



ORGANIZATION OF THE PRODUCTIVE FACTORS. 113 

different classes can arise. It is said that the business com- 
munity is always in debt, because it carries on business with 
more or less borrowed money. The owner of the business 
enterprise is an organizer and manager, and receives wages 
of superintendence, a salary which he pays himself ; he 
receives a return for risk, he pays interest and receives inter- 
est on any money he has invested, he pays wages and rent. 

The Entrepreneur. —The one who manages business for 
himself was formerly called an undertaker or an adventurer, 
but the first word has been appropriated by one small class 
of business men, and the latter has acquired a new meaning, 
carrying with it the implication of rashness and even of dis- 
honesty. We have consequently been obliged to resort to 
the French language for a word to designate the person who 
organizes and directs the productive factors, and we call such 
a one an entrepreneur. 

The function of the entrepreneur has become one of the 
most important in modern economic society. He has been 
well called a captain of industry, for he commands the indus- 
trial forces, and upon him more than any one else rests the 
responsibility for success or failure. A business which has 
achieved magnificent success often becomes bankrupt when, 
owing to death or other cause, an unfortunate change in the 
entrepreneur is made. The prosperity of an entire town has 
sometimes been observed to depend upon half a dozen shrewd 
captains of industry. It may be said, then, that the large 
reward these often receive is only a legitimate return for 
splendid social services. Such is the case, provided this 
reward is gained honestly and without oppression. Some- 
times gains are partially legitimate and partially illegitimate. 
It is this mixture, observed by all in notorious cases, which 
has probably more than anything else led to indiscriminate 
attacks on the profits of the captains of industry. 

The productivity of industry depends largely upon the 
harmonious development of all the factors. Sometimes labor 
is specially needed, sometimes capital, sometimes land ; most 
frequently what is needed above everything else is a better 



114 Outlines of Economics. 

organization of productive factors. Organization is often 
defective, and talent for organization and management is 
unfortunately rare. 

Division of Labor. — A characteristic feature of the 
organization of the factors in the present stage of industrial 
enterprises is what is commonly called a division of labor, 
but which might with equal propriety be called a cooper- 
ation of labor. Productive processes, especially in man- 
ufactures, are divided into minute parts, and one part, or 
perhaps two or three very small parts, given to each la- 
borer. One man makes one little part of a watch, another 
a second, and there are so many little parts that it is said 
that it requires the cooperation of at least three hundred 
persons to organize properly a watchmaking establishment. 
There are sixty or seventy distinct branches in the manufac- 
ture of a piano, and as many in the manufacture of a boot. 
But the word cooperation used shows that the men are 
working together. The parts divided must be united to 
form one whole. AVhen the phrase division of labor is used, 
we look at one side of the process ; when the word co- 
operation, at another. Divi'sion of labor, machinery, and 
the use of natural powers, like water, steam, and electricity, 
are the chief part of the explanation of the marvelous in- 
crease in the productivity of the productive factors, one man 
performing the labor now which^ formerly required the labor 
of ten, one hundred, or even a thousand men. 

Advantages of Division of Labor. — The advantages 
of a division of labor have been enumerated as follows: 
First, a gain of time. A change of operations costs time. 
Less time also is consumed in learning one's business, as the 
labor of each is more simple. Second, greater skill is ac- 
quired, because each person confines himself to one operation 
and in that becomes remarkably proficient. Third, labor is 
used more advantageously. Some parts of an industrial 
process can be performed by a weak person, others require 
unusual physical strength ; some require extraordinary intel- 
ligence, some can be performed by a man of very ordinary 



Organization of the Productive Factors. 115 

intellectual powers, and so on indefinitely. Each one is so 
employed that his entire power is utilized, and work is found 
for all, young and old, weak and strong, stupid and intellec- 
tually gifted. Fourth, inventions are more frequent, because 
the industrial processes are so divided that it is easy to see 
just where an improvement is possible. Besides this, when 
a person is exclusively engaged in one simple operation he 
often reflects on this, understands it thoroughly, and sees 
how the appliances he uses could be improved. Workmen 
have made many important inventions. Fifth, capital is 
better utilized. Each workman uses one set of tools or one 
part of a set, and keeps that employed all the time. When 
each workman does many things he has many tools, and some 
are always idle. 

Disadvantages. — The disadvantages of a division of la- 
bor should be noticed. It makes it possible to employ women 
and children, and the proportion of men employed decreases. 
Child labor and labor of women often displace men, and in 
American cities one sometimes finds fathers at home keep- 
ing house while children and wives are at work in fac- 
tories. The home is thus demoralized, and the rising gen- 
eration becomes weak in body and mind and depraved in 
character. 

^The dependence of man upon man is increased in the man- 
ner previously described, and this is frequently, at least, par- 
tially an evil. An international dependence arises which 
occasionally produces intense suflering. The so-called "cot- 
ton famine " in the north of England during the American 
civil war illustrates this. America grew cotton, England 
manufactured it, and this seemed to work well until it be- 
came impossible for England to secure the cotton supply 
from our South, and the result was intense suffering of hun- 
dreds of thousands of working people in no wise responsible 
for the distant war. 

Workmen are often rendered helpless on occasion of a 
change of j^roduction, having learned to do only one thing, 
which is now no longer required, and having become too old 



116 Outlines of Economics. 

to acquire a new skill. Dickens describes evils of this kind 
in his Hard Times. 

When labor is rendered simple it loses both its attractive- 
ness and its educational value at the same time. One can 
love his work when one manufactures a whole watch, bear- 
ing the impress of care and skill; but who can love the 
mere routine of raising a sledge hammer and letting it fall 
for ten hours a day? M. de Tocqueville, in his Democracy 
in America^ attributed the high average intelligence of 
Americans to the fact that labor, when he wrote, was not so 
divided with us as elsewhere. 

Remedies for the Evils of Minnte Division of 
Labor. — Education, particularly industrial training, labor 
organizations with their debates and discussions, political 
life with universal suffrage, and increased leisure, are all 
means whereby the evils of division of labor may be obvi- 
ated. When labor becomes soulless, ceasing to minister to 
fullness of life, increased opportunities for development out- 
side of the industrial field must be offered. Hours of labor 
must be shortened, but not necessarily equally. A clergyman 
or professor finds opportunities for the harmonious develop- 
ment of all his faculties in his occupation, and the reasons 
for a short labor day for factory operatives do not exist in 
his case. 

Increased Productivity. — The tremendous increase of 
productive power, due to division of labor, has often been 
estimated more or less accurately. It has been said, for 
example, that modern inventions and discoveries in the 
great civilized nations have a productive power for each fam- 
ily of five persons, equivalent to the labor of sixty slaves in 
classical Athens. Now, the civilization of Athens was 
based on slavery, and it is estimated that there were twelve 
slaves to a free Athenian family. If this estimate is correct 
natural forces do for us five times as much as slavery did for 
Athens, 



Organization of the Productive Factors. 117 



SUMMARY. 

1. The earlier industrial organization did not distinguish the three factors 
of production. 

2. Tlie guilds organized industry in the Middle Ages in a way to keep at 
least two of the three factors united. 

3. Complexity and separation have rapidly increased in our own century. 

4. The entrepreneur or manager has appeared as a new factor in pro- 
duction. 

5. Division of labor and its organization in production are characteristic of 
our day, 

6. The result is greater economy and productiveness in the industrial 
process, but a tendency to degradation and helplessness of the laboring 
classes. 

7. Education and leisure must, if possible, compensate the workman for his 
loss of inspiration in the field of industry itself. 

QUESTIONS. 

1. Why was the early organization of industry simpler than ours ? 

2. What was the guild system ? Why was it advantageous for the wage- 
earner? 

3. What is division of labor? How does it affect labor? Why does the 
workman have less chance to rise than formerly ? 

4. What is the enti'epreneur ? his function? his importance? 

5. What has brought about the division of labor and the appearance of 
the entrepreneur? 

6'. What are the advantages of division of labor? its disadvantages? 
What can be done by way of remedy or compensation? 

7. What is the relative productiveness of the present as compared with 
the earlier systems of organization ? Is this necessarily a gain? Why? 

LITERATURE. 

On the functions of the entrepreneur, see Francis A. Walker's Political 
Economy (Advanced Course), pages 231, et seri. 



PAET II. 

TRANSFERS OF GOODS. 



CHAPTER I. 

INTRODUCTORY. 

Tkai^sfees of goods are of two kinds : one-sided transfers 
and two-sided transfers of goods. Transfers of goods consti- 
tute a lai'ge part of our economic life. The business of one 
important industrial class, called merchants, consists in effect- 
ing transfers of goods. The oj^erations in which merchants 
are engaged we call commerce. But commerce requires a 
multitude of other businesses to assist it, and among them 
are especially prominent the means of communication and 
transportation, such as public roads, canals, railways, tele- 
graphs, telephones, and banks. These agents of commerce 
do not confine their functions to the assistance of merchants, 
but they aid the entire community in bringing about desired 
transfers of goods. 

Exchange. — The part of political economy dealing with 
transfers is usually called exchange, because transfers are 
mostly two-sided, and it is with these two-sided transfers 
that we are especially, though not exclusively, concerned in 
the chapters which in the present work are placed under the 
title "Transfers of Goods." Taxes, the chief kind of one- 
sided transfers, and bequest and inheritance are treated in 
Book III, since they all involve the action of the State. Money 
and banks, however, which, are treated in the present part of 
this book, are agencies for assisting in one-sided transfers as 
well as two-sided transfers of goods 



Introductory. 119 

So great is the importance of exchange that some writers 
have made it the subject of the science, and have defined 
economics as the science of exchange. While this is far from 
adequate, it is true that many of the conceptions with which 
the science deals derive their chief importance from ex- 
change. Such conceptions are especially value and price. 
^rhese terms, togetlier with certain others which arise out- 
side the field of exchange and stand in contrast with the 
terms mentioned, we must now examine and define. Too 
much importance cannot be attached to the thoroughness 
of this examination and the accuracy of the definition. 

Utility.— -This is a conception which stands in sharp con- 
trast with value. To understand its meaning in economics 
we must recall the central fact of our science, a fact which 
we are apt first to take for granted and afterward to forget. 
Economics is a science of man. Goods may be of interest to 
chemistry and physics merely as things, but they have no 
significance whatever in economics until they come into rela- 
tion to man. That fact in man which reflects upon things 
a new character and makes them goods is the fact of human 
loants. Everything starts with this fact of man's nature. In 
order to live, and still more in order to live well, a man needs 
certain things. If he is robbed of food, air, water, etc., he 
will die. If he lacks books, clothing, art, friendship, esteem, 
etc., he will live less well than if he has these things in abun- 
dance. So we say man has wants for air, water, food, cloth- 
ing, art, esteem, etc. The poicer to satisfy a hwnan want is 
utility. 

But it is apparent at once that the wants we have men- 
tioned are very unlike in character. Air and water, for 
instance, we seldom think of as things we want at all. We 
usually have them in abundance and without exertion, so 
that, though they satisfy wants as vital as any we know, we 
seldom spend any time thinking about them or our depend- 
ence upon them. On the other hand, esteem and friendship 
are very much desired and give us great satisfaction when 
we secure them, but we feel that they belong to a different 



120 Outlines of Economics. 

class. We never think of trying to buy them as we do food 
and clothing. And this suggests a third class of wants, very 
heterogeneous in character, but having this in common, that 
the things which satisfy them are objects of exchange. 
These are economic loants. The goods which satify these 
icants are objects of exchange. This distinction is one of con- 
venience, but it corresponds more nearly to the course of 
men's thoughts than any other line we can draw. Air and 
esteem, two goods so different in other respects, both agree 
in this, that men do not buy or sell them, and so do not 
consider them economic goods. Food and concerts, differing 
as they do in the most fundamental particulars, agree in this, 
that they can be exchanged for any and every kind of eco- 
nomic goods, and so each in its jjroper sphere is always 
treated as an economic good. We shall find, if we look 
around, that some goods cannot easily be put on either side 
in this classification, goods which cannot be had usually with- 
out payment, nor yet altogether for payment. Such goods are 
simply semi-economic and in no way invalidate our principle 
of classification. Having reached, therefore, a clear idea of 
economic wants, it follows without difiiculty that the power 
of satisfying an economic want constitutes economic utility. 
We need here to guard against a misunderstanding which 
the word utility sometimes suggests. There is a tendency 
to confound it with the idea of benefit, and to suppose that 
articles are useful just in proportion as they are beneficial. 
But in economics these two ideas have no necessary connec- 
tion. Utility is the power to satisfy wants, not the power 
to confer benefits. Cigars are as useful in the economic > 
sense as bread or books, for all three are articles of exchange 
and satisfy human wants. Economists have as strong opin- 
ions as anyone as to the relative benefits to be derived from 
tobacco and books, but we must not confuse our fundamental 
ideas of economics by inopportune assertions of moral con- 
victions. Economic wants may be serious, frivolous, or even 
positively pernicious, but the objects of these wants are all 
alike useful in the economic sense. 



Intkoductoky. 121 

Value. — Sharply distinguished from utility is value. The 
contrast is seen when we compare the value of articles with 
the service which they render in satisfying wants. For 
instance, take water, a good which satisfies one of the most 
important of our wants, and yet where it has any value at 
all, as in cities, it costs only a few cents per thousand gallons. 
Bread is the staif of life and of incalculable utility, but ten 
cents a day will furnish a man all he can eat. Although 
these are extreme cases it holds true generally that value is 
far below average utility. 

We must again turn to wants before we can understand 
value. We now notice that in general an economic good 
is capable of satisfying several wants of diiFerent degrees of 
importance. Thus water, first of all, satisfies thirst. The im- 
portance of this utility is altogether incalculable, for without it 
we should die.' Then it serves for bathing, a use which cer- 
tainly seems essential, but one which is far less urgent than 
the foregoing. If we had to do without one or the other there 
is no doubt which we should prefer. Then it serves for washing 
dishes, clothes, and a multitude of such things; then for 
sprinkling lawns and streets, then for fountains, artificial 
ponds, etc. All these uses and many more are economic, be- 
cause men will and do pay for water to satisfy these wants. 
Thus water has a multitude of most variable utilities. What 
then determines its value ? 

It may be well first to note some of the answers already 
given to this much-debated question. For one, the socialists, 
with Ricardo and many of the older economists, say that the 
labor spent on a thing determines its value. This seems 
very plausible in the case of water, but when we come to the 
other goods it gets us into trouble at once. For instance, in 
a church at Antwerp hangs a picture which was painted two 
centuries ago by a man who worked with great natural ease 
and finished it in a few days. Recently three hundred and 
twenty thousand dollars was oflTered for the picture and re- 
fused. Did the labor give it this value ? It is sometimes 
said that this was very valuable labor. How so ? because it 



122 Outlines of Economics. 

produced a valuable picture ? Certainly ; but is it not clear 
then that it was the picture that gave value to the labor, not 
the labor that gave value to the picture ? Stronger cases 
can be found. Trees that no man ever touched are worth 
hundreds of dollars. Land is valuable that men never set 
foot upon. Looking to the other side the evidence is just as 
strong. Men have worked months and years on pictures 
that no one will buy, and yet they have cost labor. It is 
sometimes said that such labor is not economically expended; 
but why not ? Simply because it produces nothing of value. 
So here again the labor does not determine the value of the 
pictures, but the pictures determine the value of the labor. 
We shall find that this is a general rule. Labor never gives 
value to products, but the value of products determines how 
much labor men will put into them. When they miscalculate 
the value of the product, the labor is simply wasted. 

A broader explanation of value is that it is the result of 
cost of production, including not merely labor but in certain 
cases capital and rent or use of land. However, this is open 
to much the same objections as the labor theory. It does 
not explain how some goods get value far beyond their cost 
and others fall far below it. Suppose I perfect a machine 
at a cost of ten thousand dollars which will blow soap-bub- 
bles at the rate of a million an hour ? Will it be worth ten 
thousand dollars ? Certainly not, but why not ? The the- 
ory of costs will not explain it. To say that the labor and 
materials have not been wisely used is simply to say that the 
machine has no value, which is just what we are trying to ex- 
plain. Nor will it do to say that soap-bubbles do no good. 
They may perchance be as beneficial as cigars, which end in 
smoke, and yet cigarmakers find their product valuable. 

To explain the case of those goods which are valuable far be- 
yond their cost of production reference is made to their scarcity. 
But scarcity alone does not always produce value. Platinum 
is far more scarce than gold, but only about half as valuable. 
And even when scarcity does raise value, why does it ? 

We have mentioned these attempts to explain value be- 



Inteoductoey. 123 

cauae they are very common, and this is one of the points of 
debate just now in economics, and it is important that we 
should be clear in our conceptions about it. In attempting 
to explain the origin and variations of value we will for a 
moment recall the cases we have mentioned and see if we 
can find a common element. Why will men pay for water ? 
Because they want it. AYhy did the man offer so much for 
the picture ? Because he wanted it very much. Why will 
men pay for land and trees which have cost nothing ? Be- 
cause they want them. Why will they not pay for poor 
pictures or soap-bubble machines which have cost much ? 
Because they do not want them. Thus we are forced back 
for our explanation here, as always, to man. The funda- 
mental facts in economics come from man rather than from 
things. If man desires a thing it has value, no matter 
whether it cost anything or not, and if he does not desire 
it it has no value, no matter how much it cost. 

Thus we find that value, like utility, depends on wants. 
But we have still to explain why it is that value is low when 
utility is very great, and that in general the two seem to 
rise and fall without the slightest reference to each other. 
Plainly, value and utility are different; but what is the dif- 
ference ? We can best explain this by the annexed diagram. 
We return to our illustration of water, which we 
remember had numerous uses of various dearrees of 
importance. The lower line represents the amount 
of water to be had. We have marked off five dif- 
ferent portions of the base line representing quanti- 
ties of water available for man's use. The 
Fig. 1. fipst quantity, a h, is just enough for drink- 
ing purposes. Suppose this is all the water 
N. to be had. Evidently there Avill be no ques- 
|^\^^^ tion of sprinkling lawns or 

I \ m \ rT^- — i even of bathino^ under such 



1) c d e f g circumstances. What will 

be the utility of water ? Evidently the extent of the service 
which it renders us, and as this is the saving of our life we 



124 Outlines of Economics. 

cannot estimate it. We will indicate it by the area above 
the line a b, which runs on upward indefinitely as the curved 
line fails to close in. What will be the value of another 
portion of water at this point of supply ? The whole value 
of the service the existing supply renders us ? Certainly not. 
Undoubtedly we should like more, and would pay well for 
it, but as this " more " which we desire is not needed for 
drinking but for a less important purpose, the value of water 
now will depend upon this next unsatisfied want. Now sup- 
pose we have three portions of water, represented by the 
lines ab, bc^ and c d. We now have enough for all our wants 
down to sprinkling the lawn and the street. We are willing 
to pay something for more water for this purpose, but how 
much? As much as when we had only water enough to 
drink ? By no means. The next want on our list is com- 
paratively unimportant, and of course we value an increased 
supply of water accordingly. With two or three more por- 
tions of water all our wants are satisfied, and water will 
have for us no value whatever. Thus we see that as the 
amount of water is increased the value falls along the curved 
line, h i, till finally it touches the base line where the utility of 
water ceases, and it has no value at all. Its utility, as a whole, 
is greater than ever before, but its value is now zero. With 
only one portion of water, a b, the utility is represented by 
the area j, and the value of an additional portion by the 
first dotted line. With two portions the utility is represented 
by the first two areas, and the value of each portion by the 
second dotted line. Thus the value decreases as the total 
utility increases, simply because each new portion adds less 
utility than the pi-evious one, and the utility of the last por- 
tion determines the value of each portion. This is a fact 
with which we are familiar. A poor crop of low grade wheat 
may be worth twice as much per bushel, and even more in 
the aggregate, than a fine crop of good quality. 

Our two definitions are, therefore, as follows: Tlie total 
utility of a commodity is measured by the intensity of all 
the wants which it satisfies. The value of a commodity is 



Introdijctory. 125 

the degree of the want which the existing supply of the com- 
modity has still left unsatisfied. Or, remembering that un- 
satisfied wants take the form of desires, we may define them 
thus: Utility is the capacity to satisfy icants; value is the 
capacity to excite desire. The total value of the commodity 
is equal to the number of units of supply multiplied by the 
value of the last unit, for according to what has been called 
the law of indifference no more will be given for one unit 
than for another. We might give our all for one loaf of 
bread if that were necessary for the support of life and no 
other could be obtained, but if ten loaves are offered we 
will give no more for the first than for the last.* 

Plaving defined utility and value, the remaining definitions 
are easy. 

Wecdth is €171 aggregate of economic goods. If we esti- 
mate wealth according to values we see that two statements 
of national wealth would mean opposite things according as 
goods were abundant and values low, or goods scarce and 
values high ; but the amount in the two cases might be the 
same. 

Economic well-being is an aggregate of utilities j that is, 
of satisfied vmnts, not an aggregate of values. 

Price is an expression of vcdue in terms ofmojiey. When 
you say you will give three dollars for a hat you mean obvi- 
ously that you desire the hat as much as you desire the three 
dollars, or anything else which the three dollars might buy. 

* Those familiar with recent economic Hterature will observe that this 
statement of the law of value differs somewhat from a formulation which is 
perhaps more familiar. It is frequently stated that value is equal to the 
utility of the last satisfied want. It seems to the writer of the present 
work that we produce regularly for unsatisfied want, and especially is this 
the ease in a dynamic society with increasing production. Of course if we 
are asked to part with a portion of existing supply which we intended to 
use to satisfy our wants, the value will depend upon the least important 
want which that portion could satisfy. Manifestly under ordinary circum- 
stances the two statements are nearly identical. When we consider small 
increments the last satisfied and the first unsatisfied want differ but little 
Value is viewed, then, in this work from the standpoint of the first unsatis- 
fied, want. 



126 Outlines of Economics. 

SUMMARY. 

1. Transfers of goods are one-sided or two-sided. The latter are known 
as exchange, and develop the phenomena of value and price. 

2. Utility is the capacity to satisfy wants, and things having this capacity 
are goods; exchangeable goods are economic goods. 

3. Yalue is the capacity to excite desire, and so depends npon the in- 
tensity of the greatest unsatisfied want. 

4. Utility varies for the different portions of a good devoted to different 
purposes, but value is uniform for a given time and place. 

5. Economic utility is not synonymous with benefit, but applies equally 
to unbeneficial or injurious goods if they are desired. 

6. Labor and cost do not determine value, but are determined in their 
amount by value so far as this can be anticipated. 

7. Price is value measured in money. 

8. Wealth is an aggregate of goods estimated accofding to their value. 

QUESTIONS. 

1. Why do useful things often have little value? Why do we not buy 
and sell air? Is it useful? Is it valuable? Why? 

2. Is esteem valuable? Why? Is whisky valuable ? Why? 

3. What is the difference between value and utility? 

4. What is the relation between labor, or cost and value ? 

5. Are useful things always beneficial? Why? 

6. What is price? Do high prices necessarily mean high value? 

7. What is wealth ? In what two ways may wealth increase ? 

8. Does an increase of wealth always mean an increase of economic well- 
being ? Why ? 

LITERATURE. 

1. Bohm-Bawerk, E. von: Positive Theory of Capital, Book III, is the best 
existing statement of the theory of value. 

2. Smart, W. : Irdroduction to the Theory of Value, an admirable resuviie of 
the subject in brief form. 

3. Clark, J. B. : The Philosophy of Wealth, especially Chapter Y, is sug- 
gestive. 

4. Marx, K. : Capital is the standard presentation of the labor theorj^ 
of value. 

5. Ricardo, D. : Political Economy ; 

6. Mill, J. S. : Principles of Political Economy, and 

7. Cairnes, J. E. : Some Leading Principles of Political Economy, all pre- 
sent the subject from the point of view of the cost of production. Mill and 
Cairnes are especially good. 

8. Jevons, W. S. : TJieory of Political Economy is suggestive. Articles on 
the subject of value and allied subjects are found in all the economic jour- 
nals at frequent intervals during recent years. 



CHAPTER II. 

THE ORIGIN AND ORGANIZATION OF EXCHANGE. 

We Lave defined value as the power of a good to excite 
desire, a capacity which is measured by the greatest unsat- 
isfied want which the good in question is able to satisfy. 
Thus the value of a good is not something inherent in the 
good itself, but something attributed to it by human desire. 
If desires change values change even when goods remain 
the same. Ask a milliner if hats and bonnets carried over 
from last year are as valuable as ever. By no means, and 
this purely because women have different wants or desires 
from last year. The hats and bonnets would be as service- 
able as ever if women could only be made to think so, but 
the stubborn fact that they do not think so destroys both 
utility (the power to satisfy wants) and value (the power to 
excite desire) in these articles, and no sensible milliner thinks 
of arguing against this fundamental fact. Thus we see that 
value is aftuctuating fact. Here again we reach in theory a 
truth which experience abundantly confirms. 

Individual Yalnations.— A general rise or fall in values 
such as we have noticed is b}'' no means the only variable 
factor in value. Not only do people put different values 
upon things at different times, but as a matter of course 
different peoj^le put different values upon things at the same 
time. Illustration is hardly necessary. How much does a 
woman care for a meerschaum pipe or a man for a Brussels 
lace handkerchief? The vast majority of goods we care 
nothing for so far as our own use is concerned. Even among 
people who want the same things in general there is the ut- 
most variety of opinion as to the relative importance of 
these things. There is much difference of opinion as to 



128 Outlines of Economics. 

the value which things ought to bear. In this variety in 
individual valuation lies the origin of exchange. When two 
men in primitive life find themselves in possession of things 
which they mutually desire, but each man desires his neigh- 
bor's good more than he does his own, an exchange is natu- 
ral. Thus each is better satisfied, and the utility of each 
good is increased by being used by the person who attaches 
the higher value to it. This brings us to the fundamental fact 
in exchange, the fact which alone can justify it. In normal 
exchange there is a mutual gain. We are accustomed to 
think of a merchant's profits as taken from his customers. 
But do not the customers make a profit too ? If not, why do 
they trade ? They want the merchant's goods more than 
they do their money or anything else their money will buy, 
and so they derive an advantage. Whether they derive as 
great an advantage as they might have derived if they had 
known more about trade is another question. But it re- 
mains true that in such exchange there is profit to both j)ar- 
ties. It follows naturally from this that where there is no 
mutual advantage the exchange is abnormal and unjustifiable. 
All species of gambling come under this head and illustrate 
the perniciousness of tlie principle. There is probably no 
practice known to society which more surely or thoroughly 
demoralizes men than this s]3ecies of abnormal transfer which 
has not for its object an increase of service. We may there- 
fore lay down the general law that transfers of goods are 
justifiable only ichen aggregate utility is thereby increased. 

The Development of Exchange. — We have spoken of 
exchange as originating in the fact that each of two men 
possesses a good which he values less than that belonging to 
the other. We may assume that in the most primitive ex- 
changes this unsatisfactory ownership is the result of acci- 
dent. Each man does his best to supply his own wants, and 
thinks little about other people's wants. Only rarely does 
he find that he can profit by exchange. At first, too, he 
rarely thinks of exchange. Inside the little family or clan 
of which he is a member property is held in common, and 



The Okigin and Organization of Exchange. 129 

there is no question of ownership. Outside this group he is 
probably too much at war to make exchanges. If another 
clan has something which he wants he is more likely to 
think of getting it by plunder than by exchange. Only by 
a considerable development of society toward peace and sta- 
bility can exchange secure a foothold and men add to tlie 
results of their own labor the occasional advantages of 
exchange. 

But when the habit of exchange is once established a com- 
plete transformation takes place in the economic activities 
of society. Instead of making the things he wants and ex- 
clianging an occasional article Avhicli he does not want for 
one that he does, man gradually learns to make what other 
people want and to depend very largely upon exchange to 
secure the things he wants for himself. The reason is simple. 
It is much easier and more profitable to find, raise, or make 
one kind of good than many kinds. The economic advan- 
tage of this process is almost unlimited, and the degree to 
which it is developed marks the economic progress of society. 
It is needless to say that the division of labor is dependent 
upon exchange, and exchange in any highly developed form 
likewise upon division of labor. 

Social or Market Valuations. — We have seen that the 
values put upon goods by human dcrsires vary from time to 
time, and that these fluctuations are observable in the mar- 
ket. We have noticed also that the valuations made by 
the individuals vary enormously, and that these variations 
are the cause of exchange itself. But the strange fact re- 
mains to be accounted for that these immense variations in 
individual valuation scarcely appear at all in exchange. 
Whether men want articles much or little they pay about 
the same price for them. There is a ruling market value, 
or, as we call it in the language of money, a market price. 
If a man wants an article ever so much he j)ays only this 
price; if he wants it ever so little he pays this same price 
or goes without it altogether, for it cannot be. had for less. 
How, then, is this leveling of valuations accomplished ? 



130 



Outlines of Economics. 



It may occur to us to suggest that these various valuations 
are averaged to form the market price, but when we stop to 
think of it there is much in the way of such an explanation. 
Who knows what these individual valuations are ? Who 
ever tried to average them ? How could such an average 
be enforced ? Above all, why is it that the average is so 
very low in the case of articles on which many place a high 
value, and which all purchasers value at least as high as the 
price asked? Plainly the market price is not an average 
price at all. Indeed, the principle of averages must be ap- 
plied in economics with great care. It is apt to cover up 
facts rather than to explain them. 

Recurring to our illustration of water, we have seen how 
men arrange their wants in a series beginning with the great- 
est and so on dov/n. As water is supplied little by little they 
satisfy one want after another, and value a new supply of 
water less and less as their unsatisfied wants diminish in im- 
portance. The distance between the curve h i and the base 
a ^ in Fig. 1 marks the height of value from point to point 
as the supply increases, and this we may therefore call the 
curve of value. But what takes place for society takes place 
separately for each individual. Each olie makes out a per- 
sonal curve of value for each commodity that he cares for. 



-f 


/> 


i 

c 


\ 



B 




a 


\ 


C 


h 


c 


d 





D 



ct 6 c e/ 



Fig. 2. 

Keeping to our illustration, let us suppose four persons, A, 
B, C, and D, who " want " water about as indicated in these 
four diagrams in Fig. 2. We will consider in each case 
four principal wants, though these four wants may stand for 
different uses in the case of different persons. The greatest 
want in each case is represented by the rectangle a, the 



The Origin and Organization of Exchange. 131 

second by ^, etc. A is a person wlio represents roughly the 
average gradation of wants. B cares little for water. Even 
for drinking purposes he will buy wine or beer rather than 
pay more than a certain low price for water. For other uses 
lie will pay relatively little, and for fountains, etc., he cares 
nothing at all. C is very different from either of them. 
Having scruples against intoxicating beverages, he finds 
drinking water indispensable. Believing, too, that cleanli- 
ness is next to godliness, he attaches great value to bathing, 
washing, and street sprinkling. D attaches much the same 
importance to these minor uses, but, like B, he is easily per- 
suaded to substitute wine or beer for drinking water if the 
price of the latter becomes exorbitant. It is evident that 
personal peculiarities will present curves of value of every 




possible variety. Now suppose there is water enough fur- 
nished by the water works to satisfy three wants for each 
man or twelve wants in all. It is plain that value, which 
with an increasing supply always depends upon the. intensity 
of the next unsatisfied want, will be five or six times as 
great in the case of C or D as in the case of B. Which per- 
son's demand will determine the general price ? Neither one. 
The fact is that, when a good is sold by measure and eacli 
one takes as much as he pays for, wants are not supplied 
for all individuals alike. In the present case C and D will 
satisfy all four of their wants and B only one of his. What 
happens really amounts to a rearrangement of wants in a 



132 Outlines of Economics. 

consolidated schedule something like Fig. 3. This gives a 
new curve of value.* If there is water enough for only three 
fourths of these wants, inasmuch as the furnishers neither 
know nor care how much each man uses if he only pays for 
it, the water will go to the larger wants, no matter whose 
they are. It is easy to see how much each man will get. 
The value of an additional supply will be determined by the 
largest unsatisfied want, which in this case happens to be B's 
second want. If more water is supplied the value will rap- 
idly fall. 

This may all seem rather fanciful, but something very like 
this is going on all the time. Every shrewd manufacturer is 
asking questions like these : How much of this commodity 
do people desire ? How strong is their desire for an addi- 
tional amount ? How much will the value be reduced if we 
increase the supply ten per cent ? His whole skill in fore- 
casting the market consists in his ability to estimate correctly 
the amount and intensity of the unsatisfied wants of society ; 
for it is upon these, as we have said, that value depends at 
each point of insufiicient supply. When no wants remain 
unsatisfied there is no value, and the good is as " free as air." 
This social scale of wants, in which are gathered not the 
wants of four persons but those of millions, is formed nat- 
urally enough by the simple pressure of wants in the market. 
It is different for different commodities, the curve some- 
times beginning very high and descending along a scale of 
rapidly diminishing wants to zero, sometimes varying slowly, 
each new want supplied being almost as strong as the one 
before it. 

Pnrchasing Strength. — A difficulty has, doubtless, oc- 
curred to the thoughtful reader ere this. If wants determine 
value and large wants take precedence of small ones, how is 
it that a rich man may care very little for a thing and yet 
have it, while a poor man desires it very much and yet has 
to do without it ? The difficulty is due to a change of stand- 

* We have a curve because the number of rectangles is indefinitely great, 
and the e;radatious iufinitesimal. 



The Okigin and Organization of Exchange. 133 

point as we j^ass from the individual to society. So long as 
the individual is comparing his own wants, whether for the 
different uses of one commodity or for different commodi- 
ties, his own feeling is the only thing to guide him. He 
will put the larger satisfaction first, and so on down. But 
when we have a number of personal scales of wants like 
those in Fig. 2 we cannot consolidate them as we did in 
Fig. 3, unless the men have equal power over goods. The 
reason is that while a man can compare his own wants with 
each other directly he can assert them against other men's 
wants only by means of his power over goods. What each 
man does is to make out a scale of his wants, more or less 
completely, and then apportion out his spending money ac- 
cording to their relative importance. Of course it makes 
all the difference in the world how much money a man has, 
for his wants make themselves felt in proportion to the pnir- 
chasing power that is hack of them. If B, in Fig. 2, happened 
to be a millionaire his lawn might be sprinkled though he 
personally cared nothing for such things, while D, being a 
laborer, would not get his sprinkled because his desire, 
though much stronger, is backed up with so little money. 
A millionaire's indifference is stronger than a poor man's 
yearning. Of course, if the four men in Fig. 2 are of differ- 
ent purchasing strength our scale in Fig. 3 would have to be 
entirely rearranged. 

Limit of Supply. — The supply of water in the case we 
have considered was not sufficient to supply all wants. This 
is the case with all economic goods, for as soon as they are 
abundant enough to supply all wants they lose all value, and 
are no longer economic but free goods. In the case of most 
goods, however, the supply can be increased by labor. 
What, then, makes men stop at the point where they do ? 
Why do they not make more of the goods in question and 
satisfy the remaining wants ? This is really a question of 
production, but we could not consider it until our ideas of 
value were clear. What determines the point at which men 

stop supplying a particular good ? It is often said that we 
1.0 



134 Outlines of Economics. 

stop when value falls to the cost of production. This is in 
tlie main true, but how much does it mean ? Cost of produc- 
tion is said to be composed of wages, and profits with other 
factors, all of which, as we shall see when we come to dis- 
tribution, are determined in turn by very variable human 
wants. So this answer simply means, when analyzed, that 
we stop supplying wants when w^e have to create still 
greater wants in order to satisfy them. This is true, but it 
is not a very helpful way of looking at the truth. Without 
going into the mechanism of the matter, which this is not 
the place to discuss, let us look at the general working of 
the collective economic life. 

We have seen that various wants for a given good ari-ange 
themselves in a scale, as in Fig. 3, and that these are satis- 
fied up to a certain point where value is determined. At 
this point a day's labor or a unit of other productive energy 
furnishes a given amount of satisfaction to human wants. 
But there is an immense number of goods which men are en- 
gaged in producing each of which has its own curve of value 
something like that of Fig. 3. The productive power of 
society, as we have said, is far from sufficient to satisfy all 
these wants. Hoav shall it be distributed ? Plainly, so as to 
satisfy the larger wants in each scale. Thus labor is de- 
voted to raising cotton, so that all the stronger wants for 
cotton are satisfied. Suppose more labor is devoted to rais- 
ing cotton until finally all wants are supplied. Yalue will 
fall lower and lower till with the disappearance of the last 
want value will disappear also and cotton will become a free 
good, to be had for the taking. But this j^lainly is an un- 
wise use of productive energy so long as we have not enough 
for our 23urpose ; for while we are satisfying trivial wants for 
cotton important wants for some other commodity, like 
wheat, would be sacrificed. This would be discovered by 
the fact that the surplus cotton would excite less desire, and 
this desire w^ould of course express itself in less and less in- 
ducements. Elsewhere desire would speak more loudly, and 
the distribution of labor would be readjusted. This is just 



The Origin and Organization of Exchange. 135 

what happened in the South in 1891. The cotton crop of 
that year was enormous, but to the disappointment of the 
producers the vaUie fell very low indeed. This simply 
meant that the hitherto unsupplied wants for cotton turned 
out to be feeble. Society on the whole wanted things 
which the cotton-raisers wanted, and wanted them a good 
deal more than they wanted cotton. So the cotton-raisers 
had to give a great deal of cotton to get a small amount of 
these things, which is wdiat we mean by saying that the 
price fell very low. They therefore showed that part of the 
labor spent in raising cotton had been used to satisfy wants 
which were smaller than many others still remaining unsatis- 
fied, which paid neither them nor society as a whole. As a 
result they have been trying ever since to turn some of this 
productive energy into the raising of other things, and the 
readjustment, though difficult, is sure to come. How plain 
it is that cost of production did not determine the value of 
this great cotton crop! There had been no material change 
in cost of production to produce this fall in value. More 
wants had been supplied and feebler desires remained; that 
is all. Value is determined by unsatisfied wants, that is, by 
limited supply. This limit is itself determined by a balanc- 
ing of wants against each other witli a view to satisfying 
the larger wants first, no matter what or whose that want 
is. In bringing about this adjustment the individual seeks 
in general his own interest, but in the production and trans- 
fer under strictly normal conditions, Avhich of course nowhere 
exist, the interest of society is usually the interest of the in- 
dividual and vice versa. In distribution, however, this har- 
mony of interests is at least subject to grave limitations. 
A distribution of wealth which enables a man to emj^hasize 
trivial wants so that they crowd out serious wants, a condi- 
tion of things which is ihe law of luxury, perverts this har- 
mony of interests. 

Value and Cost of Production. — The difference be- 
tween the statement of value and its relation to cost of 
production and that ordinarily given, which makes value 



136 Outlines of Economics. 

depend upon cost of production, does not invalidate the cal- 
culations of the ordinary business man. There is an approx- 
imation to equality between the two in the case of goods 
which can be freely produced ; but the question is, which is 
cause and which is effect ? It is the value of the product 
which gives value to all that goes into the product, and men 
will go on producing so long as the product has a value 
which will give them as high a return for their expenditures 
as they could otherwise obtain ; in other words, their action 
in seeking to use advantageously their economic forces, 
whatever they may be, will bring about an equilibrium be- 
tween costs of production and value. Let us take gold and 
silver as a good illustration. These have a present value 
with which their average cost of production in the past has 
next to nothing to do. This value determines what mines it 
is profitable to work and what it is not ; in other words, es- 
tablishes a margin of production. All mines on or above the 
margin will be worked ; all below it will be unworked ; but 
it is the A^alue which determines the margin, and not the cost 
of production which determines the value. There is at the 
same time a coincidence between costs and value at the 
margin. 

General Increase of Prodiictivity — We have seen that 
it was necessary to call a halt and even beat a retreat in the 
production of cotton. This, however, was not because the 
production was really excessive. Men still wanted cotton, 
and more than was offered. But with its insufficient amount 
of productivity society could not then afford to spend so 
large a portion of its productive energy on cotton. But if 
there had been an increase of productivity all along the line 
in a like proportion this production of cotton would have 
been entirely proper. Value would fall as before (that is, 
subjective valuation), but values would fall everywhere in 
the same proportion and the adjustment would be main- 
tained. Relative values would remain unchanged, which is 
the essential thing. This is what really happens all the 
time. The productivity of society is constantly increasing 



The Origin and Organization of Exchange. 137 

more rapidly than the population, and so wants which are so 
small that they once received no attention are now regularly 
satisfied. If a laborer in the days of Queen Elizabeth had 
wanted a Bible to the extent of being willing to work two 
hours for it would his want have been heeded ? But now 
it is satisfied without hesitation. ' 



138 Outlines of Economics. 



SUMMARY. 

1. Yalue fluctuates from time to time, and individual valuations also vaiy 
widely at any given time. 

2. Differences of individual valuation produce exchange, by wliich each 
party gains in utility. 

3. An increase in aggregate utility is the condition of all normal transfers. 

4. The possibility of exchange produces speciahzed production, vuider 
which the producer becomes dependent on exchange. 

5. Market or social valuations are reached, not by averaging individual 
valuations, but by arranging them in the order of importance. The valu- 
ation of tlie last portion supplied will be the market or social value. 

6. Wants of different individuals are supplied, however, not in proportion 
to simple intensity, but in proportion to intensity multiplied by purchasing 
power. 

T. Value is determined for any given article by the amount of productive 
power devoted to its production, and the limited productivity of society is 
distributed with a view to equalizing the value which a unit of productive 
power can produce in each line. 

8. General increase of productivity lowers values all around if wants re- 
main the snme, and this is a wholly desirable change ; but increase in a 
single line has to be checked, with a view to both individual and social 
interests. 

QUESTIONS. 

1. Why are goods less valuable when " out of style ? " Are they equally 
serviceable ? Why ? 

2. What other irregularity is there in values besides that of different 
times? Does this appear in market values? 

3. How do individual valuations combine to give a market valuation ? 

4. What is the origin of exchange ? Why is it profitable ? To whom ? 
Why do people not always see this ? 

5. Why is gambling illegiliinate ? Mention other cases of transfer which 
are economically unjustifiable ? 

6. What is the influence of exchange upon production? What are its 
advantages ? 

7. Are the wants of all men equally effective in determining market values ? 
Why? What effect does this have upon the total utility which society de- 
rives from its goods ? 

8. Why does value fall when more is produced? What do producers do 
in such cases ? Why ? 

9. Do values change when production increases all along the line? How ? 
Is it a misfortune ? Why? 



The Orig-in and Organization of Exchange. 139 

10. What other condition is necessary in order that the change in vakies 
should take place ? Is this other condition desirable ? Why ? 

LITERATURE. 

See works already cited, and 

Patten, S. N. : Dynamic Economics^ a difficult Vjut valuable study of the 
relation of changes in production and consumption to prosperity. 



CHAPTER III. 

MONEY AND ITS YARIETIES. 

Having discussed at length those fundamental prmciples 
on which exchange rests, we now proceed to consider its 
mechanism. The most important instrument of exchange is 
money. 

There are three different conceptions of money, namely, 
the popular, the legal, and the economic. 

The Popular Conception. — What do people mean in 
everyday language when they use the word money ? This 
question may be answered in these words : Money is tohat- 
ever passes freely from hand to hand as a medium of ex- 
change, and is generally received in final discharge of debts. 
It is as a medium of exchange that money first attracts 
marked attention, and in this it always performs a chief 
function. Nothing is money, even in the popular sense, 
which does not j^erform this function. It is in the gen- 
eral acceptance of money in payment for commodities and 
services that it performs this function. It goes between 
otlier commodities. Wheat exchanges for money, and money 
for shoes, because money is received in payment both of 
wheat and shoes. This is the j^rincipal function of all 
kinds of money. Commodities are not usually directly ex- 
changed for one another, but indirectly through the me- 
dium of money. The farmer selling his corn for money, 
and with this money buying sugar, really exchanges corn 
for sugar, the money serving merely as a convenient me- 
dium. It follows naturally from the definition that the 
credit of the person offering money is not a matter of con- 
cern in the transaction, and that his character is not inquired 
into, unless it is suspected that the money is counterfeit, 



Money and its Yarieties. 141 

that is, not really money at all. What is called money in 
the popular sense may include more but not fewer charac- 
teristics. The definition shows the substance of that which 
men ordinarily mean when they use the word money. 

The Legal Conception is different. Whatever the law 
declares a legal tender is money in the legal sense. A legal 
tender is that which the law compels persons to receive in 
payment of debt. 

The Economic Conception.* — But economists have 
framed still a third definition of money, which we may for 
lack of a better term call the economic conception. Money 
in the economic conception must perform all of the following 
functions: First, it must serve directly and immediately as a 
measure of value ; but value measures value as length meas- 
ures length. We must take as a unit a definite concrete value 
like our gold dollar, consisting of 25 '8 grains of gold, nine 
tenths fine — that is, nine tenths pure gold and one tenth alloy. 
When we say that a commodity is worth nine dollars we mean 
that its value or quantity of utility is nine times that of our 
" unit of value-measurement ; " consequently money in this 
sense must be composed of a material in itself valuable. 
Second, it must serve as a medium of exchange, and it has 
this in common with money in the popular sense. Third, 
money in the present sense must serve as a means of mak- 
ing payments, and this is facilitated usually by having a legal 
tender quality attached to it. It is then likewise money in 
the legal sense. Payments are often one-sided transfers of 
goods, and on that account the third function differs some- 
what from the second. Fourth, money in the economic sense 
must serve as a store or receptacle of value. It must store 
up value so that it can be transferred from place to place 
and time to time. Koman gold money, preserved for two 
thousand years, has brought value down to our own time; 

*It must not be supposed that this is the only sense in which the term 
money can be legitimately employed in economic discussions. On the con- 
trary, popular meanings are often the best for economic purposes if they are 
definite. 



142 Outlines of Economics. 

and gold money taken across the Atlantic bears with it 
stored-up value. 

These distinctions render it easy to answer otherwise per- 
plexing questions. Are national bank notes money ? In the 
popular sense, undoubtedly, but not in the legal sense nor in 
the economic sense. Are national treasury notes money? 
Yes, in the popular and legal sense, but not in the third sense. 
Gold money in the United States is money in every sense of 
the word. 

Functions of Money. — Money has been called one of 
man's greatest inventions, ranking with the alphabet. Cer- 
tainly present civilization would be impossible without it. 
Its services are so obvious, however, that it is not necessary 
to dwell upon them. The reader has only "to look and see." 
Exchange would be awkward and tedious without money, 
and now that labor is so divided exchanges form a part of 
our daily life. We enjoy few material good things which 
have not been exchanged in one way or another many times 
before they reach us. Without any medium of exchange 
the man with a horse who wanted a coat instead would be 
obliged to search for a tailor who desired a horse, and after 
finding him the exchange would very likely be defeated 
owing to inequality of values of articles to be exchanged. 
The coat desired might be only half as valuable as the horse, 
and the tailor might have nothing else wanted by the owner 
of the horse. Simple iik^'^jtrations like this can be continued 
indefinitely^ We can also keep values easily in mind and com- 
pare them readily when we have one common measure. 
Money enables us to travel, carrying stored-up value with us, 
and assists in the accumulation of capital by providing, as it 
were, a receptacle for it. If we raise more potatoes than we 
need we can keep them only a short time, but we can ex- 
change them for money, which can be kept. Thus we save 
our surplus. Money is a form of capital which has been 
called free. It can by exchange be turned hither or thither, 
being ready for the best use which may offer. 

Qualities Desirable in Money. — Many things have 



Money and its Varieties. 143 

been used as money during the world's history. Among 
them the following may be mentioned : Cattle nearly every- 
where; furs, especially in northern countries; oil; wampum 
among the early New Eiiglanders; tea at Russian fairs; to- 
bacco, as in Maryland and Virginia ; iron ; copper ; all the 
baser metals and the two precious metals, gold and silver. 
All civilized nations have finally found gold and silver best 
adapted among all the metals for money, and they are so 
used to-day in every part of the globe. The following are 
reasons why gold and silver are especially suitable for 
money metals: They are universally desired, and every one 
is willing to accept them. They can be used not only in the 
arts but for ornaments, and this helps to give them stability 
of value ; for if their value begins to fall the demand for 
them for other purposes than money tends to increase, and 
this prevents so great a fall in their value as would other- 
wise take place. Gold and silver are desirable on account of 
the vast quantities already in existence. The gold in coin 
and bars, and silver in coin, are now estimated to be worth 
some six thousand millions of dollars, and compared with this 
the yearly production is small, its commercial value ranging 
at present from about two hundred and forty to two hun- 
dred and seventy millions of dollars. The production of one 
mine in one year, even if extraordinarily large, produces 
a comparatively small effect, being like a glass- of water 
thrown in a pond. It must diffuse ^l,..lf over a vast surface. 
Their high specific value— that is, high value in proportion 
to weight — adapts them to use for money, because easily 
transportable. Their value at different places widely sepa- 
rated is more nearly equal than it could otherwise be. 
Durability and indestructibility are valuable qualities, while 
extreme divisibility without loss of value makes it possible 
to measure any desired value, great or small. Malleability 
renders coinage easy, and homogeneity makes any one ounce 
or pound just as valuable as any other pound or ounce. They 
are readily recognizable by their color, their peculiar ring, 
and by other attributes, and thus they are adapted to popu- 



144 Outlines of Economics. 

lar use. No other metals seem in like measure to combine 
so many desirable qualities. 

Paper Money has been extensively used. Paper money 
consists of promises to pay on demand which people are 
willing to receive in place of metallic money. They are 
usually promises either of banks or of governments. People 
take them because they believe the promise will b& kept, or 
because they think that others will accept them, or because 
they have been made a legal tender and people must accept 
them for debt, or because, as usually happens, they are re- 
ceivable for taxes. Where this confidence in paper money is 
complete it is preferred to precious metals, because more 
convenient. If any one will read all that is engraved on the 
paper money circulating in the United States he will per- 
ceive its nature, and he will discover that it is of two kinds: 
notes of national banks, and notes or certificates of the 
federal government. Adam Smith has compared paper 
money to a road through the air. It saves the use of the 
precious metals, and capital, otherwise employed as a 
medium of exchange, can be used for other productive pur- 
poses. It is thus, he says, as real a saving as if we could 
travel through the air and use the ground now occupied by 
roads for agriculture and other purposes. The "greenbacks " 
or paper money of the United States now amount to a little 
over three hundred and forty-six millions of dollars. They 
perform the function of gold and silver even better than 
gold and silver — in foreign ports, like Plamburg, often sell- 
ing for a premium — and this saves the country this amount 
of capital. To withdraw them from circulation would be 
simply a waste.* 

" Inflation." — Certain dangers connected with paj)er 
money issued by government must not be overlooked. It is 
easy to set the printing-presses at work and to issue an 

* The writer has paid a premium for Frencli paper money in Geneva, 
Switzerland, wlicre lie could have obtained gold money for par, and he has 
found American paper money selling for more than gold in Stockholm, 
Sweden, 



Money and its Varieties. 145 

illimitable amount of money. This is much easier than tax- 
ation, and has often promoted waste and extravagance. Be- 
sides, only a limited amount can be kept in circulation at its 
nominal value, and when this is exceeded it falls below 
"par," v/hich means that paper money will no longer pur- 
chase as much as the same amount of gold and silver money. 
This produces great inconvenience and suffering, because, 
according to what is called Gresham^s laio, the inferior money 
drives the better out of circulation, and prices rise on ac- 
count of the large supply of money. This diminishes the 
value of fixed salaries and of all fixed incomes, of interest 
payments on all debts and of wages, until these rise corre- 
spondingly, and this takes a long time. It is an inconven- 
ience in international trade, because foreign countries do 
not recognize the legal tender quality of j^aper money and 
will not receive it for taxes, and because foreigners lose 
faith in a paper money which is not kept at par with the 
precious metals. 

Is Paper Money Safe ? — Some have so keenly appreci- 
ated the dangers of paper money that they have entirely op- 
posed its use. This does not seem reasonable. Paper money, 
like other instruments of a high civilization, should be em- 
ployed w^itli care; but the damage which the best instru- 
ments and appliances may do when unskillfully handled 
ought not to induce us to renounce the advantages which 
they offer. Rather we ought to acquire prudence, and this 
is the course which modern nations are actually pursuing. 
Several countries are now using paper money, and our own 
among the number. When Congress decided to leave three 
hundred and fort^^-six millions of " greenbacks " in circula- 
tion alarm "was expressed in many quarters; but experience 
has pro^^ed that ap^^rehension was groundless. It may be 
said that paper money should always be kept at " par," that 
is, government should always pay coin for paper on demand. 
When this is done paper money is said to be redeemable ; 
Avlien it is not, paper* money is said to be irredeemable. 
Trroideemable paper money is bad; redeemable paper money 



146 Outlines of Economics. 

is good. Attention should then be directed to this consider- 
ation: How can paper money always be redeemed? or, how 
much can be issued with safety ? Possibly the amount the 
people will keep in circidation at par may have some rela- 
tion to the gross revenues of government, for these are pay- 
able in paper money, and consequently in making these 
payments paper money is as good as gold. The gross reve- 
nues of our various governments, federal, State, and local, 
j^ayabl.e in paper may be three times the amount of our 
"greenbacks." Perhaps we may say that for a prosperous 
community the paper money which the people will gladly 
absorb and prefer to gold and silver is equal to one half of 
all government revenues payable in this kind of money. 
Possibly, under certain circumstances, more can be kept in 
circulation. Only careful experimentation can determine, 
and an adequate " reserve " — that is, supply of coin for pay- 
ment of paper on demand — should be maintained. Our ex- 
perience in the United States is an instructive example of 
economic exj)erimentation. 

"Fiat Money." — A few years ago, however, this country 
was agitated by a proposal to create a new kind of paper 
money, a money not based on economic demand of any sort. 
This money was to be of paper, but not a promise to pay 
gold or anything else. It was to be an irredeemable paper 
money, not of the usual kind which is temporarily irredeem- 
able, and was popularly called "fiat money." The paper 
dollar would bear a legend something like this : " This shall 
be received to the amount of one dollar in payment of all 
debts, public and private;" and this legal tender charac- 
ter should be enforced by appropriate legislation. It Avas 
argued that, every man being obliged to accept this dollar, 
everyone would be willing to do so, just as our present prom- 
ise money is now accepted by people who do not wish the 
gold or silver which it promises, but who simply want to 
pass it again. The only thing necessary would be that men 
should have confidence in the power and willingness of the 
government to enforce its circulation. When this confidence 



Money and its Yakieties. 147 

existed jio exercise of power would be necessary, for every- 
one would accept it freely. 

The proposition to create this fiat money has been unduly 
ridiculed. There is nothing theoretically absurd about this 
proposition, j^i'ovided the supply of the fiat money be limited. 
The possibility of the circulation of such fiat money is con- 
ceded by economists generally. All that is necessary to make 
peo^^le accept money is confidence that it can be passed on, and 
provided the supply is limited this confidence can be based 
on the power of government to enforce a legal tender act as 
well as on its power to redeem a note for dues. But while 
the opponents of fiat money have often been superficial in 
their arguments they seem to have reached right conclusions. 
The dangers Avhich have been mentioned in connection with 
paper money in general become intensified in the case of irre- 
deemable paper money, because the safeguards of redemjotion 
are missing. If the paper is always kept at par there would 
seem to be nothing gained by the irredeemable characteristic; 
if it is not kept at par inconveniences at once result and it 
is difficult to set a limit to the issue. A general desire to 
rob the creditor class is likely to be awakened. 

Fractional Paper Currency. — This means paper money 
of a smaller denomination than one dollar. During our late 
civil war and for some time thereafter this was extensively 
used. Forty-five millions of dollars was borrowed by Hon. 
B. H. Bristow, Secretary of the Treasury, 1874-76, to pur- 
chase silver to take the place of this paper. This with- 
drawal of fractional paper currency seems to haA'e been the 
result of an excessive reaction against the abuses of paper 
money. It was extremely convenient, esj^ecially for people 
making small purchases by mail. It is said that the business 
of several large firms was seriously injured by the removal 
of this convenient kind of money. Postal notes, which lack 
many of the conveniences of fractional paper money, and 
which are far more expensive, each one costing the pur- 
chaser three cents, have been introduced as a substitute. 



148 Outlines of Economics. 



SUMMARY. 

1. Money in the popular sense is that which passes freely from hand to 
hand as a medium of exchange, and is generally received in final discharge 
of debts. 

2. Money in the legal sense is that which has been declared legal tender. 

3. Money in tlie usual economic sense is anything which serves as a 
measure of value, a medium of exchange, a legal tender, and a receptacle of 
value. 

4. Money is the necessary condition of extensive exchange. 

5. Among many things formerly used as money, gold and silver have 
been selected on account of their universal value, their use in the arts, their 
large supply, their equable production, their high specific value, and their 
suitability for coining. 

6. Paper money is a desirable money widely used, and consists of promises 
to pay. It may be either government or private, and may or may not be 
legal tender. 

Y. The great danger of paper money is the liability to inflation and the 
consequent disturbance of values. 

8. A redeemable paper currency secured by deposits and guarded in 
amount is safe. 

9. Paper currency for fractions of a dollar was displaced by silver in this 
countrj'-, apparently without advantage to the public. 

10. Irredeemable paper money or a fiat money enforced by governmental 
authority is theoretically sound in principle, but liable to grave abuse in 
practice. 

QUESTIONS. 

1. Define money from the popular standpoint; from the legal standpoint: 
from the economic standpoint. 

2. In what sense are greenbacks money? banknotes? silver certificates? 

3. What: are the functions of money? How many of these functions are 
performed by gold coin ? by greenbacks ? by silver certificates ? by bank 
notes? by checks or drafts? 

4. "Wliat are the advantages of gold and silver for money purposes ? 
What Other things have been used? Why was their use discontinued? 

5. Wliat is paper money? What varieties are there? 

6. What are tlie advantages of paper money? its dangers? Wliat is 
needed to make it safe ? How much may be safely employed? 

1. Why was our fractional paper currency replaced by silver ? What were 
the gains and the losses of this change ? 

8. What is the real basis of permanently irredeemable paper money? Is 
it trustworthy ? Why ? 



Money and its Yaeieties. 149 



LITERATURE. 

"Walker, F. A. : Money^ Trade, and Industry. 
iSTicliolson, J. S. : 2Ioney and Monetary ProUems. 
Knox, John Jay : American Notes. 

Laughlin, J. L. : History of Bimetallism in the United States. 
Jevons, W. S. : Money and the Mechanism of Exchange. 
Horton, S. D. : Tlie Silver Pound. 
Sherwood, S. : The History and Tlieory of Money. 
11 



CHAPTER IV. 

CHANGES IN THE AMOUNT OF MONEY— BIMETALLISM. 

The Amount of Money Needed. — The question has 
often been asked, How much money does a country need ? 
It has been replied, " It makes no difference. If the supply 
is abundant prices will be high ; if the supply is small 
prices will be low and the same amount of money will go 
further. A little money will do the work of money as well 
as a large supply." It is true that there is a relation be- 
tween the supply of money and its value, and that large sup- 
ply means small value and small supply large value, but the 
conclusion drawn does not follow. When the amount of 
money is small barter is always extensively used, and this is 
an inconvenience, obstructing trade and causing loss. Enough 
money is needed so that it can be used in all ordinary trans- 
actions of life, thus enabling us to avoid a too extensive em- 
ployment of barter. But one of the most common business 
transactions is the payment of wages. We need enough 
money so that it will not be too valuable to use for that pur- 
pose; in other words, the day's labor of an ordinary laborer 
should not be inferior to the value of a piece of legal tender 
coin which can be conveniently carried. We need, then, 
enough money so that the value of a coin of convenient size 
shall not exceed a day's wages of an unskilled laborer. But 
it is desirable that money should be still cheaper, so that 
wages may be divided into parts. It is not necessary for 
money to be cheap enough to enable us to make our smallest 
purchases with full legal tender money, because in addition 
to full legal tender money all countries have subsidiary coins, 
like our fractional parts of a dollar, containing less coin in 
proportion to nominal value than full legal tender, and legal 



Changes in the Amount of Money — Bimetallism. 151 

tender only for a small amount, with us ten dollars, and 
minor coins like " nickels " and " coppers " legal tender for 
still less, with us for twenty-five cents. Silver dollars fulfill the 
conditions laid down, but gold does not. Gold is more con- 
venient for large payments. The two supplement each other. 
Fluctnations in the Volume of Money. — The ground 
just given for the need of a certain amount of money, to be 
determined by circumstances, is not the only consideration 
to be kept in mind in determining the amount of money 
required by a country. After the above requirement has 
been satisfied it may make comparatively little difference 
whether we have much or little, but it makes a great deal 
of difference whether we increase or decrease the amount. 
It is not the " much or little," but it is the "more or less," 
that is of vital concern. Few things produce more intense 
suffering than a decrease in the amount of money, and this 
is on account of the connection between past, present, and 
future in our economic life. He who treats every economic 
question as if every day were a period of time apart by 
itself has scarcely taken the first step toward the compre- 
hension of economic society. Obligations have been in- 
curred in the past, and these are payable in the present or 
in the future. • Now, to decrease the amount of money 
raises the value of every debt and adds to the burden of 
every debtor, public and private. It increases the value of 
notes, mortgages, railway bonds, and local, State, and federal 
bonds. It enriches the few at the expense of the many. 
An increase in the amount of money does not have the re- 
verse effect if it is small, because on account of the growth 
of wealth, the continually diminishing use of barter, and the 
extension of trade into countries formerly outside of inter- 
national commerce, the opening up of new countries in 
Africa, Australia, . and elsewhere which need a supply of 
mone}^, the value of money tends to augment unless there is 
a growth in the supply. If the amount remains stationary 
the creditors are enriched at the expense of the debtors. 
If the amount of money is arbitrarily increased, so that the 



152 Outlines of Economics. 

value of all debts may fall, it amounts to virtual robbery of 
the creditors. When arbitrarily the amount of money is 
decreased it amounts to virtual robbery of the debtor class. 

While it may be dangerous to increase the supply of 
money arbitrarily, as by the issue of paper, it is a fortunate 
thing if the amount of money slowly and continually in- 
creases without direct government action, as by the dis- 
covery^ of new and more fruitful gold mines. The reason 
for this is that the business community is always a debtor 
community, while the idle classes are creditors, and that a 
slight depreciation in the value of money brought about by 
natural causes, and which consequently does not destroy con- 
fidence on the part of caj^italists, gives a " fillip " to busi- 
ness and helps to make it prosperous. It may also be urged 
that with the progress of improvements in industry prices 
tend to fall, and that unless money increases in amount 
those who take no active part in these improvements never- 
theless gain the benefit of them. 

Silver Qnestion and Bimetallisni. — The discussion of 
the amount of money needed by a country naturally brings us 
to two topics, called the silver question and bimetallism. Silver 
and gold are both used as money, and as government coins 
them it determines the ratio in which it will do this. A ratio 
which has been commonly established has been one to fifteen 
and a half, which means that in full legal tender coins one 
ounce of gold shall be equal to fifteen and a half ounces of 
silver. This is the European ratio, but the United States has 
established the ratio of one to sixteen. The European ratio 
was maintained for about seventy years during this century, 
principally by France, but during the latter part of the period 
by the action of a combination of countries called the Latin 
Monetary Union, in which Belgium, France, Switzerland, 
and Italy were most prominent. These countries opened 
their mints for both gold and silver to everyone, and coined 
money in the ratio of one to fifteen and a half. Everyone 
who had gold or silver could have it changed into money. 
About 1873, however, Germany, having formerly used silver, 



Changes in the Amount of Money — Bimetallism. 153 

determined to replace it with gold, and thus threw an im- 
mense amount of silver on the market, while the demand for 
gold was correspondingly increased. Other countries pur- 
sued similar courses, our own country demonetizing silver, 
that is, stopping the coinage of silver, making it only a sub- 
sidiary coin, instead of a full legal tender, as it had been. 
Like Germany, we introduced what is called gold monometal- 
lism. Gold alone was henceforth to be converted into coins 
for anyone who offered it to our mints. This action alarmed 
the countries of the Latin Union, and they suspended the 
coinage of silver. To add to the confusion, large discov- 
eries of silver had increased considerably the supply of silver, 
and the old ratio was destroyed, silver falling in a few years 
so much in value as measured in gold that it required twenty 
ounces and more of silver to purchase one ounce of gold. All 
this naturally increased the value of money, and so the value 
of all debts, producing great distress in Germany and in all 
other industrial lands. But the increase in debts was only a 
part of the mischief. Oriental and South American coun- 
tries use silver, and trade was easily carried on with those 
countries so long as gold and silver w^ould readily exchange 
at an established ratio, but when the ralio began to flugtuate 
an uncertain and demoralizing element was introduced into 
trade, which rendered it highly speculative, and entailed loss 
upon the business world. The merchant in Liverpool who sold 
goods to a merchant in Lidia agreed to receive a fixed sum of 
silver money, but in England it was necessary to turn this into 
gold, and a fall in the value of silver might bankrupt him. 

Bimetallism has been proposed as a remedy. This means 
that at a fixed ratio government must coin all gold and silver 
which anybody desires to have coined. One country alone 
cannot introduce bimetallism, because other countries might 
send to it all their silver and take away its gold, just as 
Germany evidently contemplated draining France of at least 
a large portion of her gold. Experience seems to demonstrate 
that national bimetallism is out of the question, and no 
scientific economist favors it. Economists have, however, 



154 Outlines of Economics. 

generally come to favor what is called international bimet- 
allism. International bimetallism means bimetallism based 
on an international agreement like that which obtained in 
the case of the Latin Union before 1874. It is urged that 
all countries should agree to coin gold and silver at the old 
French ratio of one to fifteen and a half, or some new ratio 
to be agreed upon. If the principal commercial countries of 
the world, say France, Germany, England, and the United 
States, should enter into sach an agreement, there is no 
doubt that the ratio could be maintained. Gold and silver 
are used principally for money, and owners of gold and silver 
would be obliged either to have it coined at the government 
ratio or sell it on the market for use in the arts. The arts 
absorb only a small proportion of the annual product, to say 
nothing of the enormous existing supply of gold and silver 
money in the world. Governments then are in the position 
of monopolists, and by agreement could maintain a fixed ratio. 
The advantages of this would be to insure a more adequate 
supply of gold and silver and to facilitate business transactions 
between gold-using and silver-using countries. 

A powerful creditor class in England, which gains by an 
appreciation in the value of money, it has been stated, has 
been powerful enough to keep England from joining in the 
action proposed by the United States and France for the es- 
tablishment of international bimetallism, and Germany has 
refused to cooperate unless England's aid could be secured. 
Consequently up to the present it has not been possible to 
establish international bimetallism. 

Recent Silver Legislation in the United States. — 
Full bimetallism now nowhere exists, but the government of 
the United States has not discarded silver or entirely demone- 
tized it. By the "Bland Bill" of 1878 the secretary of the 
treasury was required to coin not less than two million dollars' 
Avorth of silver, nor more than four million dollars' worth, per 
month. This bill was in force from February 28, 1878, till 
August 12, 1890, and under it were coined 378,166,793 silver 
dollars, or over two and one half millions per month. Twa 



Changes in the Amount of Money — Bimetallism. 165 

facts, however, developed during this twelve years of limited 
silver coinage. First it became clear that Americans could 
not be persuaded to use silver as freely as the people of Europe 
do. The long familiarity with paper money had accustomed 
us to its use and its greater convenience. The second was that 
in spite of this extensive coinage silver continued to fall in 
value. The first difficulty was met by the issue of silver 
certificates or promises to pay silver dollars. These circu- 
lated among the people while the silver dollars remained in 
the treasury. Of 380,988,466 dollars coined up to November 
1, 1890, only 65,709,664 actually passed into circulation, while 
$308,206,177 silver certificates were issued and 7,072,625 
were not issued at all. This suggested the uselessness of 
further coinage of silver dollars. 

The depreciation of silver suggested two opposite remedies. 
Some attributed it to the limitation put upon the coinage, 
and urged free coinage as a cure. Others thought it danger- 
ous to continue the issue, and urged suspension of silver coin- 
age. After a protracted struggle a compromise bill was 
passed, known as the Sherman law, by which the secretary 
of the treasury was authorized to purchase four and a half 
million ounces of silver per month at market price not ex- 
ceeding par (one dollar for three hundred seventy one and 
one fourth grains of pure silver). This was not to be coined 
but held as bullion, and in payment for it were to be issued 
legal tender treasury notes. Thus the coinage was stopped, 
and the treasury notes issued were secured by more silver 
certificates. Under this law were purchased between August 
13, 1890, and November 1, 1892, 120,479,981 ounces of silver, 
of which practically none has been coined.* The bill seems 
at present to be the object of strong attack from many sides, 
as a compromise measure is apt to be. The two factions, 
favoring expansion on the one hand and restriction on the 
other, are as little reconciled as ever, and the " silver ques- 
tion " in the United States must be regarded as a decidedly 
unsettled question. 

* 4,529,322,6 ounces purchased per month. 



156 Outlines of Economics. 

SUMMARY. 

1. The amount of money is a secondary but not unimportant considera- 
tion; scarcity leads to barter and inconvenience prejudicial to wage-earners. 

2. Changes in the amount of money are far more dangerous, impairing the 
value of contracts and injuring debtor or creditor. A slow increase, how- 
ever, seems desirable. 

3. The fixed ratios of silver to gold (16 or 151- to 1) have been disturbed 
by fluctuations in production and especially by demonetization of silver. 

4. The demonetization of silver begun by Germany and continued by 
other nations has produced much suffering and demorahzation in inter- 
national trade by limiting the supply of money. 

5. Bimetallism by a single nation would mean the substitution for gold 
of the cheaper silver rather than a restoration of the original ratios, and is 
therefore impracticable. 

6. International bimetallism is feasible, and would maintain the value of 
silver. 

t. The United States has tried limited coinage with only partial success. 
The silver coin does not circulate, but its place is taken by the more con- 
venient silver certificates. 

8. Purchases of silver bullion are now made, and treasury notes issued 
in payment, no silver being coined. The present policy gives little general 
satisfaction. 

QUESTIONS. 

1. Does it make any serious difference how much money is in use ? Why ? 

2. What happens if money is increased in amount? if it is decreased ? Is 
a small cliange desirable? If so, in which direction? Why? 

3. What is the relative value of silver and gold ? What causes have 
changed this value ? 

4. How can government affect tlie value of either metal? Why? 

5. What do we mean by demonetization ? Which metal has been de- 
monetized? Where? When? 

6. What has been the result to gold? Why? To silver? Why? To gen- 
eral prices ? Why ? To the debtor class ? Why ? To the creditor class ? Why ? 

"7. What is monometallism? bimetalhsm? Which is general? .What 
would happen, if one country tried bimetallism? 

8. What are the advantages of bimetallism? What is the condition of 
its success? Why has it not been adopted? 

9. What was the " Bland Act ? " its result ? What occasioned its repeal ? 

10. Define the "Sherman Law," and give the present status of the silver 
question in the United States. 

LITERATURE. 

See works already cited at the close of the previous chapter ; also: 
Taussig, F. W. : The Silver Situation in the United States. 



CHAPTER V. 

CREDIT AND THE MECHANISM OF CREDIT. 

We have seen the immense development afforded to ex- 
change by the use of money, a development resulting in 
division and organization of labor and a revolution of the 
whole economic life. Money, however, is entirely inadequate 
to explain the magnitude of present commercial transactions. 
Great as is the advantage of money over barter, money is too 
clumsy an instrument for modern purposes. While money 
is by no means dispensed with in our day it is characteristic 
primarily of the economic stage preceding this, and an ever- 
increasing amount of business dispenses with its use. The 
characteristic instrument of exchange in our day is not 
money but credit, and its development measures the perfec- 
tion of modern exchange. 

Like all terms which economics borrows from practical life, 
the word credit has many meanings. One of the common- 
est is indicated when we say that a man has good credit. 
We mean that he has the reputation of paying his debts and 
has the ability to do so. Men are therefore willing to sell 
him goods and wait for their pay until a future period. 
Another important meaning of the word refers, not to the 
character of the man, but to the transaction itself. The 
transfer of goods without immediate imjraeut in money or 
other goods, but with the expectation of future payment, is 
credit. It is this idea which we consider in economics under 
the name of credit. We therefore define this much-disputed 
term as follows : Credit is a transfer of goods for a proynised 
equivalent. First, the transaction is partly present and partly 
future. Second, the transaction involves confidence on the 
part of the lender, based either on the character and resources 



158 Outlines of Economics. 

of the borrower or on goods pledged by him for the fulfill- 
ment of his promise. A third factor usually present is an 
evidence of indebtedness delivered to the lender. This 
constitutes the instrument of credit, in its narrower sense. 

The Mechanism of Credit consists of two parts : first, 
the evidences of indebtedness or instruments of credit, such 
as checks, drafts, notes, bonds, etc. ; and second, the institu- 
tions of credit, consisting principally of banks and cleariug 
houses. 

The Instrnments of Credit. — A check i^ an order given 
by a private individual or company upon a bank ordering the 
payment of a certain sum of money to the order of a person 
named or to the bearer of the check. In this form of credit 
transaction the element of time is reduced to a minimum. 
If money were paid the person receiving it would yqvj 
likely carry it to the bank, and as it is he carries the check 
instead. The element of credit here prominent is the trust 
or confidence involved. Until we know that the payer 
has money in the bank we do not know whether we shall 
get our pay or not. The time element is so slight that it 
is usually disregarded. A draft is a check issued by a 
bank upon another bank. A 7iote is a written promise to 
pay. Here the time element is important and is recognized 
by the payment of interest according to laws which we shall 
consider later. A honcl is one form of government note. 
Recalling what was before said as to paper money, we see 
that promise money is only a note issued by the government 
or by a bank which for particular reasons does not bear interest. 
The ordinary instruments of credit do not circulate freely, 
like money, but are intended to be used primarily in one 
transaction. They are by no means confined to this, how- 
ever, in every case. Notes are very often transferred once, 
twice, or many times, and checks and drafts often pass through 
many hands, but always with reference to the character and 
credit of the persons involved. Their relationship to money 
does not occasion any practical difficulty. Many things in- 
dicate that one is intended for general use and the other 



Credit and the Mechanism of Credit. 159 

for particular transactions. Money makes no mention of 
any person to whom payment is to be made, and is issued 
in denominations having reference not to a particular trans- 
action but to general convenience. Instruments of credit 
are usually issued in amounts determined by particular trans- 
actions; they are issued to particular parties, and are trans- 
ferable usually only by indorsement. 

A note may be given in two ways. A person who buys goods 
for " value received " promises to pay the person of whom the 
goods are bought. But the seller may also " draw on " the 
buyer by means of a bill of exchange, also called a draft. 
Let us say A is the seller, B the buyer. A then writes out an 
order to B to pay to himself or a third party, as C, " for 
value received," the amount of the debt. A, the creditor, 
signs the bill. If B acknowledges the debt, and is ready to 
agree to pay it, he writes on the bill when presented "Ac- 
cept " and signs his name. It then becomes binding, and the 
merchant who does not pay his drafts when they fall due be- 
comes bankrupt. A check or bill may be transferred by in- 
dorsement. The person to whom payment is to be made, the 
payee, writes his name on the back with an order that the 
money be paid to a fourth party, D, the indorsee. The payee 
who indorses the instrument of credit is the indorser. The 
indorsee may assign the instrument to still another party, as 
E, by a new indorsement, and he then becomes indorser. This 
may be continued indefinitely, and thus the instrument may 
pass from hand to hand in place of money, each one who in- 
dorses it becoming responsible provided that no previous in- 
dorser can be made to fulfill his obligation. Other terms are 
readily understood, as payer, the one who must pay ; drawer, 
the one who draws an instrument of credit ; drawee, the one 
on whom it is drawn. 

Book credit is extensively used. When goods are trans- 
ferred a record of it is kept, or, as we ordinarily say, the 
goods are " charged," and a bill is afterward sent for the 
amount. A vast amount of credit is granted in this simple, 
old-fashioned way, both in wholesale and retail trade. Re- 



160 Outlines of Economics. 

cently large mercantile establishments have tried to abolish 
book credits, and it may not be too much to say that there 
has been a general movement toward restricting it and defin- 
ing its limits more accurately. 

Advantages of Credit. — The advantages of credit may 
be thus summarized : 1. Credit furnishes a more perfect and 
convenient means of payment in large sums and between 
distant places than tlie precious metals, saving time and 
labor. This is effected by means of notes, checks,, and bills 
of exchange. It is thus that only small sums of money are 
sent from one country to another in international trade. 
Only balances are paid in money. If some London mer- 
chants owe ISTew York merchants a million pounds and other 
New York merchants owe these London merchants a million 
pounds, it is obvious that no money need leave either country. 
The London merchants will send orders to their N'ew York 
debtors to pay their New York creditors. This is the simpleat 
kind of cayioellation of indebtedness. In actual life it is 
more complex, but the principle is the same. If the London 
creditors of New York merchants are not the same as the 
London debtors, the debtors could buy orders of the credi- 
tors and send them to New York. If New York merchants 
owe London merchants, it is possible that Paris merchants 
may owe New York merchants an equal sum, while London 
merchants are in debt to Paris merchants to the same amount. 
By exchange of orders all debts could be paid. This is 
called arbitration of exchange. Naturally a class has arisen 
which deals in these instruments of credit, and this is the 
class of bankers and brokers. Debtors and creditors both 
resort to them. Bankers and brokers are the middlemen 
between debtors and creditors. 

2. Credit takes the place of corresponding amounts of 
gold and silver. This is a saving, enabling us to employ the 
precious metals for other useful purposes. 

3. Capital is employed more productively. He who pos- 
sesses capital, but is for any reason unable or unwilling to 
use it, transfers it to another for compensation, and thus 



Credit and the Mechanism of Credit. 161 

both are benefited as well as the public economy. Other 
things being equal, it is given to him who will pay the most 
for it, and in a normal condition of things this is the one 
who can employ it most productively. 

4. Credit enables those who have business qualifications 
and no capital, or inadequate capital, to engage in business 
and to employ their talents for their own benefit and for the 
benefit of society. Many thus start without capital, and in 
the end become capitalists themselves. Credit has been the 
starting-point of many of the large fortunes now existing. 
Credit brings together in numerous instances capital with- 
out business qualifications or inclination for business, and tal- 
ent without capital, and thus may be said to be not without 
influence in uniting capital and labor harmoniously. This is 
particularly the case with those institutions which supply 
capital to the poorer classes, like the German cooperative 
credit unions, which furnish artisans, mechanics, and small 
traders with capital, and with American building associations, 
which furnish the same classes with capital for the construc- 
tion of homes. 

5. Credit gathers together the smallest sums, particularly 
by means of savings banks, and these small sums forming a 
large aggregate are productively employed by joint-stock 
companies and other concerns. Capital is thus concentrated, 
but its returns are scattered among the people. Credit en- 
courages capital accumulation and promotes thrift. Credit 
in this manner gives employment to small accumulations as 
they are made, and this helps men to provide for emergen- 
cies and for old age. Other advantages of credit will sug- 
gest themselves to the careful observer. 

Evils of Credit. — The dark side of the credit economy 
must not be overlooked. It continually encourages extrava- 
gance, and this is a fruitful source of fraud and embezzle- 
ment. Credit promotes precarious speculation, because those 
who engage in it have little of their own capital to lose, and 
are over-reckless with the capital of other people. Our en- 
tire land is strewn with the ruins of businesses wrejked by 



162 Outlines of Economics. 

men who have mismanaged the property which unwise credit 
gave into their hands. As credit sometimes enables the poor 
man with gifts recognized and favorably situated to become 
an independent producer, it frequently enables the one 
already producing on a vast scale to extend his gigantic 
operations and crush out men who have been independent 
producers. 

It has been said that all " consumptive credit," that is, 
credit to enable one to spend money for one's personal grati- 
fication, or for personal use in any way, is bad, while pro- 
ductive credit, credit for carrying on a business, is good ; 
but the line cannot be so sharply drawn. Consumptive credit 
frequently leads to extravagance, but it also has enabled 
many a young man to develop personal powers and to be- 
come a great artist or scholar, while, as just seen, productive 
credit frequently causes loss. 

Institutions of Credit. — Bankers have already been 
described as men who go between borrowers and lenders, or 
as middlemen in credit transactions. They are sometimes 
called dealers in credit, and there is little that they do which 
is not in one way or another connected with credit. But 
banks are not mere agents. They have a capital of their 
own which serves the purpose of a guarantee fund, and they 
receive money which their customers deposit with them, and 
mingle this with their own, gaining exclusive control over 
it all. They become the debtors of the depositors and the 
creditors of those to whom they lend money. Their source 
of profit is not chiefly their own capital, but the capital de- 
posited with them. Sometimes they pay no interest, and if 
they pay interest they charge more, the diflerence constitut- 
ing their profit. 

Formerly banks in the United States nearly all issued 
notes which circulated as money, and this was regarded as 
their principal business. Kow only national banks ai'e al- 
lowed to issue notes, and they must deposit bonds at Wash- 
ington as security for this circulation in addition to paying 
a tax for the privilege. All governments in civilized coun- 



Credit and the Mechanism of Ceedit. 163 

tries have greatly restricted the power of banks to issue 
circulating notes to serve as money, and the number of banks 
that find a source of profit in the production of bank money 
is constantly diminishing. Perhaps some day all govern- 
ments will, as has been advocated by many able thinkers, re- 
serve to themselves the exclusive right to issue paper money. 
Clearing houses are labor-saving institutions originally 
contrived by employees of banks. Banks in a city have con- 
tinual dealings with one another. A customer of a bank de- 
posits with it all his checks, no matter on what bank drawn. 
It consequently happens that a bank in New York, for exam- 
ple, will receive checks every day on all the other banks, 
while all the other banks receive checks drawn on it. For- 
merly there was continual running back and forth. A run- 
ner from each bank went to all the other banks. I^ow the 
representatives of all the banks meet in one common place, 
and exchange checks, drafts, etc., and only the diiferences 
or balances between the sums due and the sums which a bank 
owes are paid. If more is owed to a bank than is due from it 
to the other banks it receives this difierence from the clear- 
ing house ; if it owes more than is due it, it pays the dif- 
ference. Tlie sums due the clearing house and the sums 
which it must pay of course balance perfectly, and it is left 
without any money on hand. 

The clearing house statistics illustrate the inadequacy of 
money to do the business of the world. The total transactions 
of the clearing houses in the United States for the year ending 
September 30, 1888, amounted to over fifty thousand millions 
of dollars, or more than thirty times all the money in the coun- 
try, bank notes included ; for the money in the country at the 
time was only about sixteen hundred millions of dollars.* 

*Tlie manager of the New York Clearing House, Mr. ■William Scherer, 
kindly furnishes the latest statistics of that institution, which are as follows: 

Exchanges, year ending December Bl, 1892 $36,662,469,201 55 

Balances 1,888,087,262 97 

Transactions , 38,550,556,464 52 

Average daily exchanges 120,600,227 63 

Average daily balances 6,210,813 36 



164: Outlines of Economics. 



SUMMAKY. 

1. Money has proved inadequate for modern exchange, and credit has 
displaced it for ordinary large transactions. 

2. Credit is a transfer of goods for a promised equivalent. 

3. Tlie chief instruments of credit are checks, orders on a bank drawn 
by a private person ; drafts, cliecks drawn by a banl<; ; promissory notes, 
bills of exchange, and book credit, or "charging." 

4. Credit greatly economizes money transactions and the attendant nse 
and transportation of the precious metals, and aids in the productive em- 
ployment and wise distribution of capital 

5. Credit often results in speculation and waste as well as in destructive 
commercial warfare, disastrous both to individual and public welfare. 

6. Banks are institutions for facihtating credit transactions. 

1. Clearing houses are institutions to facilitate transfers of credit between 
banks. 

QUESTIOIsTS. 

1. "What different meanings has the word credit? In which sense is it 
used in economics ? 

2. Is there always a time advantage in credit ? "What other advantage is 
there in credit payment? 

3. What is a check ? a note ? a bill of exchange ? a bank draft ? What 
other kind of draft, and how is it used? 

4. What is a note? a bond? 

5. What is the advantage of a note ? of a check ? 

6. What is book credit ? What is the present tendency regarding it ? 
Why? 

*7. What effect does credit have upon the productiveness of capital, and 
why ? upon the accumulation of capital, and why ? Have these two re- 
sults any connection, and if so, what? 

8. What are the evils of credit? Are the evils to society as serious as to 
individual owners? Why? 

9. What is a bank? Enumerate all the functions of a bank. How do 
they make their money ? Is this legitimate, and why ? 

10. What are the advantages of bank money? its dangers? the present 
tendency regarding it? 

11. What is a clearinghouse? What are its functions? About what 
part of the checks and drafts drawn on New York banks are- mutually can- 
celed ? How are the balances paid ? 

LITERATURE. 

Knox, John Jay : Reports as Comptroller of the Treasury, in United States 
Finance Reports for 18*75-^6. 



Ckedit and the Mechanism of Ckedit. 165 

Gilbart, J. S. : History, Principles, and Practice of Banking. 

Dunbar, C. F. : Tlie TJieory and History of Banking. 

Bagehot, Wal ter : Lombard Street. 

Morse, J. T. : Banks and Banking. (This work presents the legal side of 
the subject.) 

Walker, F. A. : Jfoney, Trade, and Industry ; and Political Economy. 

Ely, R. T. : " German Cooperative Credit Unions," in the Atlantic Monthly, 
February, 1891. 

See the article "Clearing System" in the English Dictionary of Political 
Economy. Edited by R. H. Iiiglis Palgrave. Also articles in other diction- 
aries and cyclopedias. 
12 



PAKT III. 

DISTRIBUTION. 



CHAPTER I. 

DEPIlsriTIONS OF DISTRIBUTION AND RENT. 

It has already been remarked that the production and the 
distribution of the annual income of society cannot be sharply 
separated, and the reader must have observed that more or 
less has been said about the four parts into which the prod- 
ucts of industry are usually divided, namely, wages, interest, 
profits, and rent. Taxes may, perhaps, be regarded as a fifth 
part into which the annual income of society is divided, and 
we may treat taxes as the i^art which society, organized as 
the State, receives for its participation in production. But, 
if this view is taken, we have a fifth part peculiar in so many 
respects that it is desirable to treat it neither under produc- 
tion nor distribution. 

The greater part of distribution might undoubtedly be con- 
sidered under the general heading " Production," but on the 
other hand it is frequently asserted that distribution is " the 
true center of all economic inquiries," and it would be pos- 
sible to treat nearly the whole of production from the stand- 
point of distribution. The truth is that these old traditional 
divisions of our subject-matter indicate different points of 
view, and on this account it seems desirable to retain them. 
When we pass from production to distribution we do not 
enter by any means an entirely new field, but we look at an 
old field of investigation from a new point of view. 

We have to discuss under the name distribution two dif- 



Definitions of Distribution and Rent. 167 

ferent processes. The lirst and inclusive meaning of the 
term is the distribution of wealth or income of society among 
individuals and families ; in other words, the question of indi- 
vidual fortunes, poverty and wealth. This distribution is 
to a large degree the result of conscious effort on men's part 
to control it. The second kind of .distribution is the divi- 
sion of the product among the different factors of produc- 
tion. This is not a question of wealth versus poverty, but of 
wages versus interest, profits, rent, etc. Of course this kind 
of distribution affects the question of private fortunes very 
considerably, but it is by no means the same question. It is 
not at all clear that it would not be better to call this kind of 
distribution by a different name, but here, as in the case of 
capital, usage is too strong for us, and we must consider two 
things under one name. There is need of care, therefore, 
that we know just which idea is meant when the word is 
used. 

There is another sense in which the word is not used in 
economics. We never mean by distribution the moving of 
goods about over the country from the point where they are 
manufactured to the place where they are consumed. When 
we hear of railways or other concerns as " distributive agen- 
cies " we are using the word distribution in a sense wholly 
different from that of the economic term distribution. Dis- 
tribution is a question of ownership^ not a question of the lo- 
cation of goods. 

This brings us to the question of the institution of private 
property, and recalls the fact that whatever may be the 
origin of private property its present existence is due to 
government. It is not the individual who maintains the in- 
stitution of private property, or modifies it by conscious ef- 
fort, but the State. Now, the question of private fortunes 
depends primarily upon the action of the State regarding 
private property. This general distribution is therefore a 
question not of private but of public economics, and its con- 
sideration comes in Book III. Our attention in this place 
will, therefore, be confined to that subsidiary process of 



168 Outlines of Economics. 

dividing the results of production among the different factors 
which have combined to produce them. This process, which 
we may call product distribution, is chiefly controlled by un- 
conscious social forces, and the State interferes only in a gen- 
eral way and to a limited extent with the workings of these 
forces. Such conscious interference as there is is largely the 
work of private organizations. 

Rent. — Rent is that which is paid for the use of land. In 
spite of sundry attempts to extend the meaning of the word 
it has remained one of the best defined and least ambiguous 
terms in economic science. But while economists are nearly 
agreed in their use of the term the popular meaning of 
the word is much less exact. That which is paid for the use 
of a house or building of any sort is commonly called rent. 
We shall see that this so-called rent really consists of two 
elements, one a ground rent, or rent proper, the other capi- 
tal rent, or what we shall call gross interest. If this distinc- 
tion seems fanciful it is only because we are accustomed to 
see the two united under one ownership. But in most large 
cities separate ownership is common. Sometimes one man 
owns the land and leases it for a long term of years to an- 
other who erects buildings upon it, which either with or with- 
out payment become the property of the landowner at the 
expiration of the lease, unless it is renewed, and if it is 
renewed the one who possesses the house must frequently 
pay for it. Often, however, the separation in ownership is a 
permanent one, the houseowner paying perpetually an an- 
nual sum for the use of the ground. This is the case in 
Baltimore, for examj^le, where ground rents are an important 
feature in the economic life of the city. 

In such cases the two kinds of rent are very clearly distin- 
guished. We shall see later that they are really governed 
by different laws, so that Avhile capital brings a less return as 
society develops, land brings an increasing return. Let us 
remember, then, that in economic discussion generally the 
term rent means only an income from land, and that it is 
used only in this sense in the following discussion. 



Definitions of Distribution and Rent. 169 

The principal difficulty connected with the subject of rent 
lies in determining the law which governs its amount. As 
has been ah-eady said, the portion of produced goods falling 
to the share of the different factors of production is deter- 
mined in the first instance by laws independent of human 
contrivance. Of course men may and do supplement or in- 
terfere with the operation of tliese laws to any extent. Some 
of these efforts we shall consider in the present book, others 
in Book III, but for the present we shall confine ourselves to 
the fundamental laws already referred to. 

The first thing to be noted about land is its quality. Dif- 
ferences of fertility are familiar to everyone, and depend 
upon what has been known as " the natural and indestructible 
properties of the soil. " An effort has been made of late by 
certain writers to minimize or deny the significance of this 
factor. It has been said that " soil " is not indestructible, 
that it may be exhausted or removed from land altogether, 
and that it may in turn be created by means of fertilization, 
etc. These writers recognize in land no other indestructible 
property than standing room. This objection arises from 
the use of the word soil in a narrow sense. If by "soil " we 
mean only that thin top layer of the land containing some 
elements necessary to plant life, it is true that this may be 
carted on or off at pleasure, that it may be wasted or replen- 
ished. But, granting this, there still remain many qualities 
of land which are indestructible and unproducible, and which 
so directly afiect the productiveness of the land that we may 
not inappropriately call them "properties of the soil." Such 
a property is the conformation of the land. A steep gravelly 
hillside will by no possible effort equal a plain in fertility. 
The north side of a mountain cannot be made to produce the 
same as the south side. Climate is, to be sure, not a " prop- 
erty of the soil," but it is an inseparable appurtenance of the 
land, and upon it the productiveness of the land primarily de- 
pends. It is needless to say that the ownership of a piece of 
land carries with it the advantage of all the conditions which 
attach to that land. It is simply true, therefore, that the 



170 Outlines of Economics. 

expression "natural and indestructible properties of the soil*' 
is an inadequate and misleading expression ; not that there is 
nothing but standing-room to be considered under such a 
term. We will therefore adopt another expression to ex- 
plain what we mean by quality in land, namely, the irremov- 
able conditions affecting its productiveness. Of these its 
extent (standing-room), its conformation, and its climate are 
essentially natural and indestructible. Others, such as are 
connected with the " soil " in the narrow sense, are not inde- 
structible nor necessarily natural, but they affect rent none 
the less. In defining quality as the conditions affecting 
productiveness of land we have discarded the word " soil " 
because it has proved itself treacherous ; we have omitted 
the words "natural and indestructible" because fertility 
may be artificial and is always destructible. On the other 
hand, fertility, even when artificial, becomes essentially a 
part of the land. Of course, it is physically removable but 
not economically so. From the case where capital is em- 
bodied in land and entirely assimilated to it in character we 
pass by insensible gradations to fences, barns, houses, etc., 
which more and more assume the character of capital as dis- 
tinguished from land. It would, of course, be possible to re- 
strict the term land to strictly natural land and apply the 
term capital to all products, including the soils of old 
land. This would be a logical distinction, but, like so many 
logical distinctions, it would be confusing. On the other 
hand, if we include under land all capital that has been in- 
corporated in it we must recognize that there is no absolute 
line of division between land and capital. Thus we are 
again reminded that distinctions in economics, as well as in 
practical life, are questions of convenience, and are good or 
bad according as they are more or less useful. 

The second great fact regarding land is location. On one 
side this is closely connected with climate. Land situated 
near a body of water or near a mountain range is much af- 
fected by these great controllers of climate. But a more 
distinct meaning of the word is location with regard to the 



Definitions of Distribution and Rent. lYl 

consumers of products. Everybody knows that land a 
hundred miles from market is worth more than land a 
thousand miles from market. The difference is simply one 
of transportation. This, however, is not simply a question 
of distance, but also one of accessibility. Land may be far 
away and yet easy to reach, or near and difficult of access. 
It will be noted that any change in the cost of transportation 
affects rent. The rents of England have been revolutionized 
by cheap ocean transportation, which has practically brought 
distant land very near to her shores. 

To this fact of location we must ascribe almost wholly the 
enormous rents paid for city lots as contrasted with the 
insignificant rents paid for lots in the suburbs or in small 
towns. Here, again, transportation powerfully affects rents. 
Good means of rapid transit increase the value of suburban 
lots and check the rise of city rents. It is believed by some 
that the development of these means of transit will not only 
stop the advance, but even bring about a reduction in city 
rents, which have been increasing for a century or more. 

Having noticed that land differs greatly in quality and 
location, we may now reduce these two differences for pur- 
poses of convenience to one. Suppose a man in New York 
city owns two farms, one in Dakota and one in New York. 
If the farm in Dakota produces thirty bushels of wheat to 
the acre and it costs ten bushels of this to get it to New 
York city, while the New York farm raises twenty-two 
bushels and it costs two bushels of this to get it to market, 
the farms are equally productive so far as the owner is con- 
cerned. If the other conditions of production are the same 
the land is equally valuable to the owner. To be short, we 
may say that the two pieces of land are equally good land. 
Whenever we speak of good land, therefore, in connection 
with the subject of rent, we mean land which for all reasons 
taken together is desirable. 



172 Outlines of Economics. 



SUMMAKY. 

1. " Distribution " may mean the distribution of wealth among individ- 
uals, or the distribution of the product among the factors of production. 
The latter is included under private economics. 

2. Rent is that which is paid for the use of land. Capital invested in 
houses, etc., is not included in land in this sense. 

3. Land differs in quahty, that is, in fertihty, climate, accessibility, etc. 
Its quality is to be estimated by its net productivity or abihty to put prod- 
ucts into the market. " Good land " means productive land well located. 

QUESTIONS. 

1. "What two meanings has the word distribution in economics? What 
third meaning not recognized in economics ? 

2. In which of the economic senses is it used in Book IT ? Why is the 
other postponed to Book III ? 

3. What differences are there in land? What is meant by "good land " 
in economics ? 

4. What two meanings are there for the word "rent? " In which sense 
is it here used? What is included under land ? 

LITERATURE. 

George, Henry : Progress and Poverty. 
George, Henry: Social ProNems. 
Walker, F. A. : Land and its Bent. 
Clark, J. B. : Capital and its Earnings. 



CHAPTER II. 

RENT WITH AND WITHOUT FREE LAND. 

Rent must be considered in two aspects: first, rent while 
free land remains; second, rent when all land is taken. The 
latter is seldom realized, but it is the certain outcome if 
population continues to increase and private property in 
land is maintained. 

Rent with Free Land. — Under these conditions there 
is a certain amount of land which may be had for nothing. 
Of this land some is cultivated which pays no rent; other is 
not cultivated at all. Why, then, will land bear rent under 
such circumstances ? Obviously, because it is more desirable 
than the land which may be had for nothing. How much 
rent will it bear? Just as much as it is more desirable. 





A 


a' 


A 




B 


b' 




— - 


C 


6" 


y 




D 


({' 












E 


e' _ 


f\ 


^__ 











f r 


G » 


i 












r. 



Fig. 4. 

Suppose Fig. 4 to represent the land of a country (foreign 
land being excluded from competition for the sake of our 
illustration) arranged in seven groups, according to desir- 
ability. The first group, deduction made of enough of the 
product to pay transportation on the crop, will raise and send 
to market 28 bushels of wheat per acre, the second 24, 
the others 20, 16, 12, 8, and 4, respectively. Now, if the 
people are few and need but a small part of the land, they 



174 Outlines of Economics. 

will naturally cultivate A, or the land which best combines 
fertility and accessibility. So long as there is enough of 
this land there cannot well be any rent, for a man will not 
pay rent for what he can get for nothing. But the time 
comes when more land is needed, and cultivation must begin 
in group B.* Land is still free there, but all of group A is 
taken. If now a man insists upon cultivating land in group 
A he must pay for the privilege, for the owner will not con- 
sent to move off onto poorer land unless he can maintain his 
advantage. How much is this advantage ? Four bushels 
per acre, for labor alone working upon free land can pro- 
duce only 24 bushels. The land in B, which is free, 
is now the "margin of cultivation," that is, the grade of land 
which will pay for cultivation, and no more. The natural 
reward of labor in agriculture is the total return to cultiva- 
tion on the margin of cultivation, after deductions are made 
on account of the returns to capital and its replacement. 
This advantage which the owners of A land now have over 
the tillers of free land, whether they let the land or not, is 
rent. The amount per acre at this point will be the market 
price of four bushels of wheat. 

With the development of population more land is needed, 
the margin of cultivation descends to C land, the reward of 
simple labor is diminished, and rent increases. B land now 
pays a rent of four bushels and A land a rent of eight 

* It of course hardly need be said that tliere is no such gradation of land 
as is represented in Fig. 4. The real variation would be more nearly rep- 



Fig. 5. 

resented by a figure like Fig. 5. If we consider city lots, also, the extremes 
of value would be immensely greater than is here represented. These facts, 
however, do not alter the principle. 



Kent With and Without Free Land. 176 

bushels per acre. When the margin of cultivation has 
extended to E, rents on B land equal one half and on A land 
four sevenths of the entire product. It is clear that at this 
point the productivity of groups E, F, and G may be had for 
the taking. A moment's reflection will show that a portion 
of the productivity of the other groups may also be had free. 
Rent 'With no Free Land. — Continuing the descent of 
the margin of cultivation down from E to F and G, we can 
easily imagine a time when all land should be called for and 
no free land would be left. Following the law already 
explained, rent would absorb more and more of the product, 
until, with the disappearance of free land, the entire product 
would be consumed as rent. This is of course possible if the 
owners of the land cultivate it with their own hands. In 
this case rent is indistinguishable from return to labor, the 
only difference being that owners of the best land are better 
rewarded than the others. But this direct cultivation by 
owners is very far from general. Long before land is wholly 
taken up in any country a great deal of it is held by men 
who do not cultivate it with their hands but who lease it to 
others. In this case the owner or landlord appropriates the 
rent, leaving the free productivity to the tenant as the reward 
of his labor. As rent increases the margin of free produc- 
tivity decreases. But there is clearly a limit to this, for 
tenants cannot work for nothing and turn all the product 
over to the landlord. Rent may pass down the scale, say to 
E or possibly to F, but it must stop at a point where the 
tenant will have enough to live. Thus it is that even in 
countries which long ago had need of all their land some land 
bears little or no rent. Under existing methods of cultiva- 
tion a man cannot pay a rent for it and live off its produce. 
We may thus picture to ourselves the law of rent as an 
advancing force which slov/ly but surely carries everything 
before it until it is met by the law of wages* which checks 
and finally arrests its progress. This arrest of the progress 

* Of course tliere must be at least a minimum return to capital, but that 
is here neglected as a minor factor. 



1Y6 Outlines of Economics. 

of rent practically means that the poorest land, land which will 
not pay rent or even repay cultivation, is only nominally appro- 
priated or appropriated for other than purposes of production. 
Intensive Cultivation. — Returning to our figure, let us 
place ourselves again at the point where all the A land is 
taken and new members of society are looking for more land. 
We have assumed that they will take up land in the second 
group. This is not necessary, however. More labor may be 
put on the land already cultivated and more will be raised. 
Suppose that ten men cultivate 100 acres of A land, raising 
2,800 bushels of wheat. But the numbers increase, and to 
each such group one more is added. As the cultivation 
was, of course, imperfect additional labor increases the crop. 
The eleven men raise 3,060 bushels; that is, the eleventh man 
has raised 260 bushels; not so much as the others raise, but 20 
bushels more than he could have raised on B land. Of course 
the owner gives him only so much as he could get elsewhere 
and secures an additional rent of 20 bushels. Encouraged 
by this, he hires a twelfth man and secures a crop of 3,280 
bushels. The two extra men have raised 480 bushels by 
their labor; but this is just what the landowner had to pay 
them for their labor. He therefore finds that while one 
additional man increases his rent two do not, and discharges 
the second, who takes up free land. Thus as numbers increase 
a part of the increase aids in intensifying the cultivation of 
the old land, while another part takes up new Jand. With 
each fall in the margin of cultivation more labor may be 
profitably employed on land already cultivated. Thus our 
landowner who could not afford to employ a twelfth man at 
240 bushels wage can employ a thirteenth or possibly more 
when the return to labor falls to 200 bushels. Each addition 
of labor (or capital) in the cultivation of land in<ireases the 
return, hut not in the same proportion. This is the law of 
"diminishing returns," one of the most stern-visaged laws 
in economics, which indicates that, other things being equal, 
each addition to the number of human beings on the earth, 
beyond a certain number at least, makes harder the process 



Rent With and Without Free Land. 



177 




by which man draws his sustenance from the earth. Before 
this certain number is reached the law of diminishing returns 
does not begin to operate, but one of increasing returns 
obtains. We may suppose that up to the tenth man in the 
example given every man added more than the previous to 
the product as a certain number of men is needed for the 
most effective organization of production. The law of 
increasing and diminishing returns would be represented 
by a diagram somewhat like Fig. 6. 

The inclosed areas represent returns to each unit of pro- 
ductive energy, and at E the maximum is reached and the 
law of diminishing returns 
begins to operate. As 
we shall see, however, 
other things are not equal, 
and this law is partially 
counteracted by another. ^W- ^' 

It is to be noticed that the power of rent to make laborers 
work for an ever smaller return is due, not chiefly to nature, 
but rather to the institution of private property. So great 
has the hardship of rent seemed to some that it has been 
proposed that society should appropriate rents through the 
mechanism of government, or, what amounts to the same 
thing, that private ownership of land should be abolished. 
This proposition we shall consider later. 

All improvements in the methods of agriculture increase 
the product more than they increase the cost. The popula- 
tion can thus live on less land, and poorer land is thrown out 
of cultivation, as to-day in our New England States. Thus 
the margin of cultivation is raised and rent decreases. As a 
matter of fact, however, in old countries this is only a tem- 
porary result. The population is sure to increase, and this 
usually at so rapid a rate as to keep pace with improvements. 
Not only does the margin of cultivation not rise, but it may 
actually fall, because, with better knowledge and methods, 
poorer land will repay cultivation and the additional cultiva- 
tors are sure to be forthcoming. When land is all taken^ 



178 OtJTLiNES OF Economics. 

rent, as we have seen, is limited by the law of wages only, 
and if the improvement here is less than in methods of culti- 
vation, as has often been the case, the landowner may not 
only have larger product, but a larger percentage of the 
product. If we were dealing with the law of rent as an iso- 
lated force, the tendency of improvements in land cultivation 
would undoubtedly be to decrease rent; but considering soci- 
ety as it is, the tendency may be the reverse. All develop- 
ment of production subsequent to agriculture, by which raw 
materials receive an increasingly large amount of labor, tends 
to improve the lot of labor. 

Rent and Yalne (or Price). — Rent has no influence 
whatever on the value of products, although a large part 
of this value goes to the landowner. This will be clear 
Avhen we recall the nature of value already explained. Value 
is due to unsatisfied wants or desires. It is human desires 
which, becoming more numerous and more clamorous, force 
cultivation down to poorer and poorer lands. If men do not 
want wheat sufiiciently to give a man for twelve bushels of 
it as much to satisfy his wants as he could get in the same 
time in some other way he will not cultivate the twelve 
bushel land. If they do he will. Thus the extent of culti- 
vation measures the strength of human desire in this line 
and determines value. When desire makes wheat valuable 
enough to pay for cultivating this poor land it will be 
cultivated, not before; but it is desire, not the cultivation, 
which gives wheat its value. The fact that some land pro- 
duces wheat easily and pays a large rent to its owner has no 
effect on value. Men cannot be expected to sell wheat below 
the price fixed by human desires just because they got it 
easily, and if they did the millers would simply add the 
difference to their profits. The abolition of rent payment, 
or the appropriation of rent by the public instead of by pri- 
vate persons, might have a great influence on the economic 
life of society, but it would not have any direct influence in 
lowering the price of agricultural products. 



Eent With and AVithout Free Land. 179 



SUMMARY. 

1. Rent is that portion of the product of land which is in excess of the 
product of the poorest land under cultivation. 

2. So long as good land exists in excess of all demand (free land), rent is 
determined by the excess of product over that of the best free land. 

3. When land is all taken, and all is cultivated which will repay cost, 
rent is determined by the excess of product over the necessities of laborers 
as determined by the law of wages. 

4. Increased demand for the products of the soil may result in the culti- 
vation of more land (extensive cultivation), or in the application of more 
labor and capital to that already in cultivation (intensive cultivation). 

5. Each addition of labor or capital in the cultivation of land beyond a 
certain point increases the return, but not in the same proportion (the law 
of " diminishing returns "). 

6. Improvements in agriculture, with free land and a stationary popula- 
tion, would decrease rent, but in old countries, and with an increasing pop- 
ulation the opposite result may take place. 

7. Value and price are not affected by rent. 

QUESTIONS. 

1. On what is rent based ? If all land were equally good would it bear 
rent while free land existed ? Why ? 

2. How is the amount of rent determined while free land exists ? How 
is the reward of labor determined ? 

3. What limits rent when land is all taken ? What would rent then be 
if the law of rent operated unchecked ? 

4. What is meant by intensive cultivation ? What determines how far 
it will pay? What is the law of diminishing returns? 

5. What is the margin of cultivation? What effect does a lowering of 
the margin of cultivation have upon intensivity of cultivation ? Why ? 

6. What is the effect of improvements in cultivation, so far as the law of 
rent alone is concerned? What is the effect in an old country where pop- 
ulation is increasing ? Why ? 

T. What is the effect of the development of production subsequent to 
agriculture ? Why ? 

8. What effect has rent on price or value ? Why ? 

LITERATUBE. 

See works already cited at the close of the preceding chapter. 



CHAPTER III. 

WAGES. 

We have seen that of the factors which contribute to pro- 
duction land and labor are the two primary ones. Having 
discussed rent, or the j^ortion of the product allotted to the 
owners of land, we next consider wages, the portion allotted 
to labor. In the case of simple agriculture, where labor and 
land are the only factors (capital playing often an insignifi- 
cant role), we have seen that wages are determined by the 
productivity of free land so long as free land exists which 
will produce in excess of the absolute needs of labor. Work- 
men in other industries, too, will have their wages determined 
by the same rule, for they are not likely to accept less than 
they could earn by working free land. But, as we have 
seen, there comes a time when with the increase of popula- 
tion the margin of cultivation drops to a point where it en- 
counters a definite resistance in the shape of a law of wages 
which will not be forced down beyond a certain point. It is 
this law of wages which we have now to consider. 

It follows from the law of value that if wage-earners did 
and could exist in excess of all demand, their services, if 
fully offered, would have no value, and wages would be noth- 
ing. On the other hand, if they were few and much desired, 
only the intenser wants could be satisfied, and the value of 
labor would be very high. We see, then, that the value of 
labor depends upon two things : first, the number of wage- 
earners ; second, the desire for labor. We must consider the 
forces which determine these two. 

The Nnmber of "Wage- earners. — We have already no- 
ticed the tendency of the human race to multiply. Beyond 
all doubt the desire of marriage and family is one of the 



Wages. 181 

strongest and most universal of human desires. But over 
against this desire are offset many others, such as the desire 
of food, clothing, and a multitude of other things, desires of 
every variety of importance, which, of course, are arranged 
and satisfied in the order of their importance. No sane man 
satisfies weaker desires at the expense of stronger ones. Now, 
in this list of desires marriage must take its place accord- 
ing to its importance. This varies with individuals. Food, 
clothing, and shelter almost necessarily take precedence of 
marriage, though with very varying ideas as to the necessary 
amount. Some will regard education, books, luxuries in 
dress and household furnishings, art, or even a simple bank 
account, as more important than marriage, and will forego 
the latter for tlie sake of the former. The number and 
character of the toants lohich a man considers more important 
than marriage and family constitute his ^^ standard of life.'''' * 
Whenever on the downward scale wages fall below the 
point where the standard of life can be maintained for a 
family, the workman will do without the family and main- 
tain the standard of life for himself alone. This fact of 
everyday experience is observed especially among those 
whose standard of life is somewhat superior to that of 
the ordinary wage-earner, as, for instance, clerks. It is 
proverbial that they do not marry as soon as they would like 
on account of their small income. In the great shop in Paris 
known as the J^on Marche, the widow of the founder left at 

*It may bo objected tliut tliis defmition limits to a single relation a fact 
wliicli affects human life in many other connections. This limitation is, 
liowever, intentional. While a man's wants may affect his action in many 
ways, it is only as they lead men to refuse to bring beings into existence 
except under certain conditions of subsistence that these wants become a 
"standard of life." TJio standard of life thus constitutes a sort of "ulti- 
matum " on the part of laborers, a limit below which they will indeed work 
if tlie}^ must, but below wliicli they will not, perhaps cannot, maintain their 
numbers. Of course it more often limits tl\e size of a family than prevents 
its formation. A general lowering of the standard of life, an increased in- 
difference as to the fate of our posterity, is the most appalling possibility 
suggested by our science. 
13 



182 OuTLmEs OF Economics. 

her death to each of the three thousand employees a sum 
varying from |200 to $2,000, according to their term of serv- 
ice. An immediate result of the legacy was seventy-nine 
marriages among the employees of the institution. These 
people, finding it impossible heretofore to marry without low- 
ering their standard of life, remained single until this legacy 
made it possible to do so. 

Economic Importance of the Standard of Life. — It 
is plain that the standard of life by restricting marriage lim- 
its the number of wage receivers, and so tends to increase 
the value of labor. If we were to adopt the conception of 
economics which many writers have unconsciously followed, 
as the science which treats of employers in their relation to 
wealth, the maintenance of a high standard of life for work- 
men might seem undesirable. So long as employers look 
upon the rest of animate creation as composed of varieties of 
quadruped and biped cattle, designed for their service, the 
only standard of life which they will consider is one which 
will maintain a certain standard of working efficiency. The 
distinction between biped and quadruped will hardly be con- 
sidered. This is the natural standard under a system of 
slavery. It shocks us to-day to hear the allegation that 
slaveowners * once discussed in convention the expediency 
of using a slave up in six years or four years in a certain 
occupation, and decided that it "paid" to use him up in 
four. But liow much better is it when employers discuss the 
desirability and necessity of keeping an army of men unem- 
ployed in America in order to "keep down the price of 
labor?" Whether these reported discussions ever occurred 
or not it is hard to determine, but there can be no doubt that 
they represent an attitude of mind which has widely pre- 
vailed in human society. The brutality of such propositions 
comes from a false conception of laborers as a class of men 
who have no right to exist for their oion sake. It is some- 

* It must not be supposed that this correctly represented the ordinary 
slaveowner in the United States. Most slaveowners in our South had the 
welfare of their slaves at heart. 



Wages. 183 

times objected that economics should not consider such ques- 
tions. Why not ? It is the science of man in his relations 
to wealth ; not of some men in some of their relations to 
wealth, but of all men in all their relations to wealth. It is 
fundamental to an understanding of economic life, not to 
mention the solution of economic problems in society, to 
know whether all men are men with wants entitled to final 
consideration and maximum satisfaction, or only some men 
are men and the rest a variety of cattle or productive ma- 
chine. 

But even economic considerations from the employer's 
standpoint condemn the policy of depressing the standard of 
life. We now know that in the advanced stnge of industrial 
development slavery is unprofitable even to slaveowners. 
This is only a phase of the larger truth that labor, to attain 
its highest efficiency, depends upon the development of in- 
telligence and character as well as upon brawn. Too much 
emphasis cannot be laid on the phrase recently become 
familiar, that "cheap labor is dear labor." "To keep down 
wages " means to decrease the efficiency of labor in the long 
run by an even greater amount. 

This brings us to a point suggested before. The value of 
labor is determined not only by its amount, but also by the 
wants which it is called upon to satisfy. Now, who calls for 
labor — that is, for the goods which labor produces ? Evi- 
dently society, in the person of all its members. The im- 
mense majority of these are laborers. To keep down their 
standard of life means in so far to limit the amount of goods 
they can call for, and thus narrow the field of industrial 
action and the possibility of employers' profits. It is true 
that by this lowering of the standard of life more laborers 
are brought into existence, and labor partly makes up in 
quantity what it loses in quality ; but it is doubtful if even 
then the employer is benefited. The policy of keeping down 
the standard of life is therefore economically false. It curtails 
the means of life and with it the development of life, and 
results in enforced idleness, inevitable inefficiency, and neces- 



184 Outlines of Economics. 

saiy poverty. Its advantage is that it temporarily profits 
indimd'ual em23loyers. 

Social Importance of the Standard of Life. — This 
will need but few words after what has been said. The 
]3roper goal of society in every line is to make life increas- 
ingly worth living for all its members. We are forced to 
ask in such connections, In what does national prosperity con- 
sist ? Certainly not in simple resources. A million dollars 
is not necessarily affluence. It depends upon the number 
who share it. Still less does prosperity depend on simple 
numbers. There is no gain in exchanging happy fewness 
for multitudinous misery. Least of all can a nation's pros- 
perity be measured by the affluence of a few resting on a 
substratum of genei'al poverty. That nation is most pros- 
perous which shows the highest average in the ordering and 
furnishing of individual lives. To this end it is indispen- 
sable that the general standard of life should be raised as 
high as possible. Man must have as many wholesome wants 
as is consistent with the existing possibilities of production. 
Such an increase means an increase of wages, an increase of 
consumption, an increase of production, an increase of indi- 
vidual and social well-being. This is vejy different from 
saying that men need simply an increase of wages. Only so 
far as there is a developed set of wants in a man can he 
spend wisely as regards himself or society. The result of a 
sudden increase means usually increased vice at first, and 
later simply a larger number of beings living at the old scale 
of miser}^ Such a change is a positive disaster, devoting 
the increased productivity of the country to the extension of 
misery rather than to the extension of well-being. And yet 
an increase of wages is essential to any wholesome develop- 
ment of wants. The only essential is that education in 
many lines should accompany increase of wages. Every 
new invention, every new discovery of resources, every pos- 
sible addition to our productivity, may be utilized for the im- 
provement and not simply for the multiplication of our 
people. The course of action to be pursued admits of no 



Wages. • 185 

doubt if a man hopes or cares to improve the condition of 
men. Men [all men) must he encouraged to loant and en- 
abled to satisfy all loholesome loants as fully as the develop- 
ment of prodiictimty loill allow. We must raise the standard 
of life. 

It must be observed in conclusion that employers them- 
selves are the victims of an attempt on the part of society 
to establish an unethical equilibrium of balanced self-interest, 
an effort which has given one man in twenty, through the 
power of competition, the ability to dictate a code of oppres- 
sion to the nineteen employers who are more humane than he. 
Tliat such a system should be disastrous in its working and 
require serious modification is the lesson both of reason and 
of modern experience. The prohleyn of the twentietJi man, 
the mean man, who coerces nineteen others against their will 
to follow his meanness, is one of the most serious problems 
in the field of applied economics. 

In the next chapter we shall consider some of the causes 
which have operated to raise the standard of life of the 
wage-earning classes. 



186 Outlines of Economics. 



SUMMARY. 

1. So long as free land exists wages are determined by the product on 
the best unappropriated land. 

2. Since the value of labor, as of all other goods, is determined by the 
desire for it, the amount offered is an important factor in determining 
wages. 

3. The increase of the laboring population is determined by its " stan- 
dard of life," that is, by the number and character of the wants which are 
considered more important than marriage and family. 

4. An effort to depress the standard of life can be of advantage only to 
employers, and that only temporarily. It eventually diminishes the demand 
for all goods. 

5. From the standpoint of society it is of the utmost importance that the 
wants of all should be increased as rapidly as social productivity will allow. 

QUESTIONS. 

1. Mention one cause of high wages in America. 

2. "Why do wages tend to fall to the limit of subsistence ? 

3. What is meant by the standard of life? 

4. Wh}'- is cheap labor dear labor? 

5. Is it for the interest of employers to lower the standard of life? In 
what sense? Why do not employers consult their general and permanent 
interests? (This last needs a very thoughtful answer.) 

6. What is the interest of society in this matter? Why ? 
V. What is meant by the problem of the twentieth man? 

LITERATURE. 

See works already cited for previous chapters ; also : 

Walker, F. A.: The Wages Question. 

Gunton, G. : Wealth and Progress. 

Schoenhof, J. : Industrial Situation and the Question of Wages. 



CHAPTER IV. 

THE LABOR MOVEMENT. 

It is a matter for regret that in a book like this so little 
notice can be taken of the efforts, often heroic and largely 
successful, of individual employers to benefit workmen. Such 
efforts, though very important in the aggregate, are hard to 
get at, and so various that the principles involved cannot be 
analyzed or even mentioned in an elementary work. A 
single important exception will be considered later. It is 
not surprising, however, that the most important movement 
to raise the standard of life of wage-earners has originated 
with workmen themselves. 

Labor Organizations. — The old mediaeval guilds were 
organizations of all the factors of production. Employ- 
ers and emjiloyed united in one body regulated produc- 
tion, but the control rested chiefly with the masters. Mod- 
ern labor organizations embrace, as a rule, only one of the 
factors, the employed, and their purpose is to promote the 
interests of this one factor whenever those interests clash 
with those of the emj^loyers. 

Trades Unions and Knights of Labor. — Labor or- 
ganizations may be divided into two classes, and as a 
matter of fact they are so divided to-day in the United 
States. These classes are the trades unions and the Knights 
of Labor. The trades unions are primarily organizations of 
skilled artisans. According to the old trades union idea, each 
craft should be organized by itself. The Knights of Labor 
are, according to their original idea, organizations of em- 
ployees both skilled and unskilled, regardless of trade. They 
aim to break down the barriers to common action found 
in differences of occupation. The Knights of Labor have 



188 Outlines of Economics. 

also taken a broader outlook upon society, and have sought 
to accomplish greater things than the trades unions. The 
trades unions presuppose a difference of interest between em- 
ployers and employed. They are, as it were, a fighting body. 
This divergence of interests exists, and fighting bodies often 
preserve peace. "If you would have peace prepare for 
war " is an old maxim, and struggles between labor and cap- 
ital have been most violent in Belgium, where no efficient 
organizations have existed. But the Knights of Labor have 
looked beyond a period of conflict to a union of productive 
factors which should be peaceful. They hope in some way 
to see labor and capital united in the same hands. They de- 
sire to make capitalists of wage-earners and to organize pro- 
duction on a cooperative basis. It is doubtless on account of 
this ultimate aim that tliey admit employers, of whom many 
are members, and filso the professional classes, a considerable 
number of teachers, journalists, and preachers being also mem- 
bers. The Knights of Labor are in so far a return to the 
principle of the old guild association. 

Knisfhts of Labor and trades unions have both modified 

o 

their original programs. The trades unions have united in 
larger federal organizations, first in the central labor unions 
of our cities, and later in the national body, the American 
Federation of Labor. This national body has also made pro- 
vision for the organization of unskilled workingmen, and for 
local unions of workingmen of different trades where those 
engaged in each trade are too few for separate organization. 
The Knights of Labor have, on the other hand, organized 
separately a considerable number of trades in what are often 
called " district assemblies," and have thus recognized more 
largely than they were at first inclined to do the principle of 
federation with separate crafts as a basis. 

A bitter contest beween the Knights of Labor and trades 
unions has been waged, but there is now some evidence of an 
effective desire for harmonious cooperation in the prosecu- 
tion of common aims. 

Gro-wth of Labor Organizations. — It has been esti- 



The Labok Movement. 189 

mated that at least a million workingmen in the United 
States are members of labor organizations. The number, of 
course, varies. A period of prosperity for the organizations 
is generally followed by one of reaction, and the present 
seems to be a period of recovery from the period of reaction 
which began early in 1886, perhaps in 1885, and continued 
for several years. Reaction always terminates in a new ad- 
vance, and thus far in the United States each new advance 
has carried the labor organizations farther forward than ever 
before. 

Farmers' Organizations.— There are two powerful or- 
ganizations of farmers, the Patrons of Husbandry and the 
National Farmers' Alliance and Industrial Union, the latter 
the more radical and the more inclined to political action out- 
side of the two old parties, especially to political action with 
the third party, called the Populist. These fanners' organ- 
izations are more like the old guilds in this, that they are or- 
ganizations of independent producers designed to protect 
their interests against attacks from other social classes. Re- 
cent years have, however, witnessed an approach of labor or- 
ganizations and farmers' organizations to each other for the 
attainment especially of common political aims. 

Labor Organizations a Natural G-rowth. — Labor or- 
ganizations are not forced products. They have grown up 
almost spontaneously. They have arisen naturally out of 
modern industrial conditions. Wherever capital is a separate 
factor in production, and is organized on a large scale, labor 
inevitably organizes itself sooner or later in order that it may 
stand on an equal footing and make labor contracts advan- 
tageously for itself. Let us suppose one capitalist employs a 
tliousand men. If these men are not organized each man 
individually treats with all the capital in the establishment. 
All the capital is represented by one man, but one workman 
represents but a thousandth part of the labor force, and he is 
not in a position of equality. The workmen therefore unite 
their labor, and speaking through one representative place 
all the labor against all the capital. This is something which 



190 Outlines of Economics. 

so naturally suggests itself that we find labor organizations 
in all modern lands. 

Opposition to Labor Organizations. — Labor organiza- 
tions met at first with violent opposition, and it cannot be 
said that in their earlier stages or even in their later growth 
this opposition is by any means groundless. However, what- 
ever bad traits naturally characterize labor organizations are 
aggravated so long as they are obliged to struggle for exist- 
ence. Whenever the fact of their right to exist is frankly 
acknowledged, and employers, ceasing to persecute them or 
their ofiicials, recognize the man who treats in a representa- 
tive capacity for the sale of the commodity labor as cour- 
teously as they would an agent for the sale of corn or wheat ; 
finally, whenever courts cease to harass them with legal 
chicanery, as courts long did in England, they tend to be- 
come strong and conservative. The fact is undoubted that 
most serious abuses and outrages have attended the progress 
of labor organizations, but they have simply exhibited weak- 
nesses of frail human nature and weaknesses which have 
been observed in more frightful manifestations in those other 
organizations, nevertheless excellent, which we call Church 
and State. The true course is to recognize the beneficence 
of the j)rinciple of organization and to contend only against 
abuses. It can scarcely be too much to say that this is the 
opinion of nearly all competent observers in England, Ger- 
many, and the United States. The following quotation about 
labor organizations from Work and Wages, by the late Pro- 
fessor Thorold Rogers, of Oxford, not only expresses the 
view of many scholars and business men, but illustrates a 
common change of attitude on the part of many fair-minded 
persons who have seen previous prejudices against labor or- 
ganizations displaced by a careful examination of their claims: 
" These institutions were repressed with passionate violence 
and mali<2rnant watchfulness so lonof as it was nossible to do 

O O J. 

so. When it was necessary to relax the severities of the 
older laws they Avere still persecuted by legal chicanery 
whenever oppression could on any pretext be justified. As 



The Labor Movement. 101 

they were slowly emancipated they have constantly been 
the object of alarmist calumnies and sinister predictions. I 
do not speak of the language of newspapers and reviewers, 
which simply re-echoed the passions of the hour ; far graver 
were the allegations of Senior and Thornton. ... I con- 
fess to at one time having viewed them suspiciously ; but a 
long study of the history of labor has convinced me that they 
are not only the best friends of the workman but the best 
agency for the employer and the public ; and that to the ex- 
tension of these associations political economists and states- 
men must look for the solution of some among the most 
pressing and difficult problems of our times." 

It may be proper to state that while the author does not 
hope for so much as Professor Rogers seems to from labor or- 
ganizations alone, his experience has in the main been the same. 

Space is too limited to permit an explanation of the im- 
measurable misapprehensions of the general public in regard 
to labor organizations. One of them is that innocent and 
peace-loving workingmen, perfectly contented, are misled 
by agitators who have been j^laced at the head of labor or- 
ganizations. Careful observation will show that the influ- 
ence of labor leaders is conservative on the whole, and that 
strikes originate among the masses and are generally resisted 
by the leaders so long as it is possible. It will also show 
that leaders are readier than a large proportion of the " rank 
and file " in the organizations to terminate strikes. 

Success and Failure of Strikes. — Strikes produce 
harm, and every effort should be made to avoid them. They 
are, however, successful in more cases than is ordinarily sup- 
loosed, and when occasionally a decided victory is scored the 
gain is immense. An agitation of a few weeks and a strike 
of a few days, together with an act of legislature, established 
a reduction of the hours of labor from seventeen to twelve 
for the hundreds of street-car employees in Baltimore. This 
is probably an advantage permanently secured. Other illus- 
trations might be given, and nothing is gained by shutting 
our eyes to such facts. 



192 Outlines of Economics. 

Violence is disastrous, and tlie welfare of the masses can 
only be secured by peaceful measures. While condemning 
in deserved terms violence, which too often accompanies 
strikes and which reacts against workingmen, it is only fair 
to recognize the fact tliat this violence is largely due to 
criminal classes in cities which improve such op23ortunities 
for disturbance, and not wholly to the workingmen. It is 
manifest, however, that, even so, it is only another argument 
against strikes wherever they can be avoided, and for the set- 
tlement of differences between labor and capital by peaceful 
arbitration. 

Temperance. — E'early all labor organizations are temper- 
ance societies, and many of their officers are total abstainers. 
They have greatly diminished intemperance among those 
who belong to them. 

Educational Value. — Their educational value is also 
noteworthy. The debates and discussions which they foster 
stimulate the intellect and do much to counteract the deaden- 
ing effects of a widely extended division of labor. 

Labor organizations bring men and frequently also women 
together and furnish opportunities for social culture. Temp- 
tations to coarse indulgence are thereby lessened, and an im- 
portant side of human nature receives better opportunity for 
development. 

It is here especially that labor organizations are to find 
their justification. It is often objected that they try to ex- 
clude worthy men from their limited number and seek by 
distressing a part of their number to raise the wages of the 
rest. What they are really trying to do is to raise the work- 
man's standard of life, which implies that betterment shall 
take the place of multiplication and wants be allowed room 
to increase. It is said that the limitation of numbers in one 
trade can only overcrowd others, and that if all trades were 
successfully organized nothing would be gained. Sucli an ob- 
jection overlooks the fact that the operation of the union tends 
to check imprudence and maintain a just balance between 
numbers and the means of development. No purpose could 



The Labok Movement. 193 

be more laudable, though it cannot be said that it is always 
wisely or successfully pursued. 

It may be hoped that labor organizations are preparing 
the way for a better civilization. Certainly one of the most 
hopeful features of the situation is the willingness of organ- 
ized workingmen to listen to strong and manly words from 
those who understand their real purposes, who go among 
them and, with sympathy for their just aspirations, endeavor 
to help them to distinguish between the foolish and the wise, 
the wrong and the right, to show them how to pursue the 
good, and to inspire them with faith in that righteousness 
which alone can exalt the masses in a nation ; that is, the 
nation as a whole. 

"Weaknesses of Labor Organizations. — Some of the 
weaknesses of labor organizations have already been inti- 
mated. These weaknesses are partly inherent and partly ac- 
cidental, and it may be well to summarize them. 

1. Based on Strife. — ^They are as a rule based on strife. 
They aim to prepare their members for industrial war. Now 
we must hope for peace in society, and an organization which 
does not look beyond contention to a cessation of strife has 
inherent in it a certain weakness. 

Apart from all other considerations, it should be noticed 
that strife inconveniences the general public, and even when 
the real blame rests upon employers, as happens often enough, 
the workmen appear before the public as tlie aggressors. 
They are the ones who refuse to accept certain conditions of 
employment, and necessarily they try to induce others to act 
with them. The general public is not apt to examine care- 
fully into the real merits of the case and to analyze conduct 
minutely; consequently the workmen are held responsible. It 
will be noticed that if the public is inconvenienced seriously 
for any length of time, as happens particularly in the case 
of strikes on railways, gas works, and the like, although 
sympathy may have been at first with the workmen, the 
public at large soon grows weary and impatient and shifts 
its sympathy to the employers. Public opinion can make 



194 Outlines of Economics. 

itself felt through legislative acts and judicial decisions and 
thus hurt organized labor. 

It may be admitted, on the other hand, that there has 
been a gratifying growth of other features than war features 
in labor organizations generally, both in other countries and 
our own. The Knights of Labor, as already mentioned, in 
their declaration of principles at least, emphasize the desira- 
bility of measures designed to secure social harmony. 

2. Limitation of their Benefits. — They have been, partic- 
ularly in the past, at least, partial monopolies. !N'ot infre- 
quently have they sought to gain benefits by an exclusive 
policy. It is only recently that attention has been given to 
the organization of unskilled laborers, and for this extension 
credit is due in England to the "new trades-unionism," as it 
is called, and in this country especially to the Knights of 
Labor. It has been well said by John Stuart Mill that in 
earlier times partial monopoly in trades unions might be jus- 
tified as a policy, because it might then have been possible to 
elevate only a few out of the great mass ; but that now the 
time had come for broader measures. While there has been 
improvement, it must be admitted also that there is a reason 
for limitation of numbers which is not always apparent at 
once. Unscrupulous employers have at times sought to in- 
crease unduly the number in a single occupation in order to 
have a reserve force of unemployed workmen from whom 
to draw in time of need and thus to keep down wages. 

3. Production Not Directly Increased. — It is to be no- 
ticed furthermore that labor organizations as such do not 
directly increase production, nor do they as such diminish 
the wastes of competition. What must be desired is not 
merely that a greater proportion of wealth should fall to the 
wage-earning classes, but that the total national dividend to 
be distributed among all should be increased. 

4. Their Tlltra-conservatism. — Tliis is an objection which 
will sound strange to many, yet it has often been found 
that these organizations have clung to old methods and have 
been disinclined to favor progress which has not immediately 



The Labor Movement. 195 

benefited them as labor organizations. This weakness is 
closely related to that which follows. 

5. They often Take JSfarroio and Short-sighted Vletos. — It 
has been one of the weaknesses of labor organizations in 
general that they have not been sufficiently interested in 
public measures and in reforms designed to benefit society 
as a whole, the wage-earners included. They have not 
given sufficient attention, for example, to sanitary measures, 
and have not supported adequately public health authorities 
in their efforts to benefit especially the poorer classes in the 
community. It has been frequently observed that they 
underestimate the importance of pure politics and a highly 
trained stable civil service, although they are the ones above 
all others to gain from such measures. At times they have 
favored measures ultimately injurious because such measures 
have increased temporarily the supply of work. This, for 
example, was the case with those labor organizations in 
Baltimore which petitioned the municipal authorities to grant 
a franchise to a competing gas company because it would 
give them Avork. The opposition to labor-saving machinery 
also falls under this head. It may be wise for labor organi- 
zations to attempt to gain greater benefits from such mechan- 
ical improvements and to minimize the evils, but not to 
oppose improvements. 

6. TtacJc of Flexibility. — Labor organizations share the 
weakness which is common to all great political and social 
organizations. It is necessary to act according to general 
rules for the most part, and it is difficult to take account 
of individual cases. One who examines into the nature 
of labor organizations can see many reasons why union 
men refuse to work with non-union men. The union entails 
certain expenses, and it is claimed that non-union men 
receive the benefit of organization without bearing any 
part of the burden. More serious, however, is the danger 
that unscrupulous employers will gradually substitute non- 
union men for men who are strong in the organizations, and 
thus break down the organizations before the workmen really 



196 Outlines of Economics. 

perceive what is going on. Pretext can easily be found to 
discharge an obnoxious workman, however faithful and 
efficient he may be. Yet it must be admitted that sometimes 
wrong is done to workmen who have the best intentions 
with respect to their fellow-workmen and are entirely 
willing to bear their share of the burdens of common action. 
There are workmen who, on account of their religious views 
or for other reasons, have conscientious scruples against 
membership in one or another organization, or perhaps all 
labor organizations. Employers have refused to recognize 
unions because it would compel them to discharge efficient 
workmen. While recognizing the difficulties in the situa- 
tion, it would seem that it ought to be possible to devise 
plans which would take account of exceptional but, after all, 
frequently recurring cases. 

7. JSFot Capable of Political Government. — Labor organ- 
izations have at times conveyed the impression that gov- 
ernment ought to belong to them. It would seem that their 
best friend ought in all sincerity to counsel them that what- 
ever the cause may be, and liowever much the fact may be 
regretted, they have not the trained intelligence and the 
moral strength to govern the country. The labor organiza- 
tions are useful, and they give us the standpoint from which 
to judge public measures. Whatever benefits the wage- 
earner truly and permanently is likely to benefit the coun- 
try as a whole ; but the tendency to favor workingmen 
for office is not one which can be encouraged as a reform. 
The a})pointment of workingmen to office is often used by 
demagogues in power to turn attention away from genuine 
reforms. Tlie appointment of one workingman out of a 
thousand to a political office does not help the remainder. 
What the workingmen need is the best men possible in 
office. 

It should be said in conclusion that the election of thought- 
ful and intelligent workmen to legislative bodies, whether 
local. State, or national, is to be viewed differently from the 
appointment to administrative office. Legislative bodies 



The Labor Movement. 197 

should include representatives of all social and industrial 

classes, and highly trained administrative officers should 

carry out their behests. Do the workmen desire inferior 
public servants — public servants whom great corporations 
would not employ ? 
14 



198 Outlines of Economics. 

SUMMARY. 

1. Modern labor organizations embrace generally a single factor of pro- 
duction rather tlian a trade like the ancient guilds. 

2. The Knights of Labor, however, in contrast with the federated labor 
unions, admit others thaij wage-earners, and partly ignore trade lines. 

3. Farmers' organizations have rapidly developed of late, and have be- 
come a powerful political factor. 

4. Labor organizations are a natural outgrowth of our industrial system 
witli its centralized capital. 

5. Labor organizations were first subject to violent opposition with an 
emphasis of tlieir obnoxious features. With a partial removal of opposition 
they have become more conservative and helpful. 

6. Strikes are an expensive but often successful means of advancing 
labor interests. 

7. The principal value of labor organizations is that of education and the 
promotion of temperance. 

8. The weakness of labor organizations consists in their hostile attitude, 
their exclusiveness, their unproductive character, their ultra-conservatism, 
their short-sightedness, their lack of flexibility, and their indifference to 
political reform in the larger sense. 

QUESTIO]XrS. 

1. What two kinds of labor organizations have we to-day? How does 
each differ from the ancient guild ? 

2. What changes are going on in both kinds of labor organizations ? 
What seems likely to be the eventual basis of labor organization ? 

3. What two principal farmers' organizations have been developed, and 
what are the characteristics of each ? 

4. Wiiat has been the political outcome of these organizations? What 
organizations have contributed to this? 

5. Why have labor organizations developed so rapidly ? Why have they 
developed so spasmodically ? 

6. What i> a strike? What are its advantages? its disadvantages? 
AVhat is the attitude of labor leaders toward it? 

1. What was the attitude of the public toward labor organizations at 
first? What was the result? Why? 

8. What are the weaknesses of labor organizations ? 

lilTERATUBE. 

Clark, J. B. ; The PJnlosophy of Wealth. Chapter VIII. 
McNeill, Geo. E. : The Labor Movement, the ProUem of To-day, 
Jevons, W. S. : Tlie State in Relation to Labor^ especially Chapters IV, V, 
and VIL 

Rogers, Thorold : Worh and Wages. 
Ely, R. T. : Labor Movement in America. 



CHAPTER V. 

PROFIT SHARING AND COOPERATION. 

Profit Sharing in the United States. — Labor organi- 
zations strive to secuie higher wages for workingmen than 
they would otherwise obtain, and thus to increase their share 
of the products of industry. Profit sharing goes a step fur- 
ther than labor organizations. Those who advocate profit 
sharing wish wage-earners to secure a portion of profits in 
addition to ordinary wages. It is held that this arrange- 
ment promotes economical use of material and machinery by 
employees, and generally increases their zeal and efiiciency. 
The result is a larger total j)roduct and a larger revenue for 
the wage-receivers. Profit sharing has been extensively 
tried in the United States, and it has been successfully intro- 
duced by some of the largest productive establishments in 
the country. Recent testimony of American employers who 
have tried it is very generally in its favor, although one 
prominent manufacturer abandoned it, and one or two have 
not found that it quite realized their expectations. Some 
influential employers appear to be enthusiastic in their praise 
of its practical working, and a member of a firm which has 
distributed over one hundred thousand dollars of profits to 
its employees writes to the author that he and his partners 
consider it the best investment that they ever made. lie 
thinks that they liave the most loyal set of workingmen in 
the world. Instances recorded in three months showed that 
at least ten thousand workingmen had in that period been 
admitted to a share in profits in the United States. 

Profit sharing may be extended to capital sharing — partial 
ownership of capital by workingmen and participation in 
management. The large manufacturing establishment of 



200 Outlines of Economics. 

Godin, in Guise, France, serves as the best example which 
occurs to the author. M. Godin gradually educated a large 
body of working-people to that point where they could take 
a part in the management of his large business, and at the 
same time encouraged them to acquire a part of the capital. 
If recent reports are trustworthy the workingmen have 
finally acquired and now manage the entire business. 

If we call industry, as ordinarily organized in our great 
mercantile and manufacturing establishments, despotism, we 
may call an establishment where laborers participate in cap- 
ital ownership and management, under the chief control of 
some one who is recognized as an industrial superior, a con- 
stitutional monarchy. These terms, although indicative of 
mere analogies, are, after all, instructive. The despotic prin- 
ciple, the one-man power, both in politics and in industry, 
is an excellent thing in its own time and place, and in in- 
dustry it has necessarily continued longer than in the po- 
litical sphere. It is a j)hase of development, but it ought 
not to be regarded as final. A large part of the indus- 
trial troubles of modern society undoubtedly find their 
origin in the fact that development of the economic depart- 
ment of social life has proceeded more slowly than the de- 
velopment of other departments. Elsewhere the des23otic 
principle has been softened or displaced, but continuing in 
the economic sphere it is a discordant element; yet it is dif- 
ficult for most of us to see how for a long time to come we 
can wholly dispense with the one-man principle in industry. 
It should, however, be softened as far as practicable, and 
men should be gradually trained to understand industrial 
republicanism or democracy. M. Godin has set a noble ex- 
ample. 

Industrial democracy means self-rule, self-control, the self- 
direction of the masses in their efforts to gain a livelihood. 
Industrial democracy is industrial self-government, and this 
is found in pure cooperation. 

Cooperation is of two kinds : coercive, which means 
governmental action, and voluntary. We have here to do 



Profit Sharing and Cooperation. 201 

with voluntary cooperation, and this is what is usually meant 
when cooperation is spoken of. Workingmen combine their 
own capital, purchase their own plant, manage their own af- 
fairs in their own way, at their own risk, sharing profit 
or loss as the case may be. This is called productive co- 
operation. But we have also what is called distributive co- 
operation. Distributive cooperation means cooperation in 
distribution, not in the sense in which the word is used ordi- 
narily in economics, but rather in the sense in which we 
might speak of a merchant's activity in distribution. He 
distributes wares. Distributive cooperation refers to retail 
and wholesale trade, and is only an imperfect form of co- 
operation. Purchasers of wares, groceries, dry goods, etc., 
combine together to purchase what they need, and thus save 
profits. They form a stock company, subscribe for shares, 
employ a manager and clerks who often do not even share 
in profits, and start a business. Profits are sometimes di- 
vided only on shares, but the approved way is to pay a 
moderate interest on capital and to divide profits between 
stockholders and customers in proportion to purchases, the 
division being made at the end of stated intervals. Some 
establishments in Great Britain, and doubtless elsewhere, 
carry out the full program, and give employees a share of 
profits. Profits are thus said to be divided among caj^ital, 
custom, and labor. 

Distributive cooperation has in England and Scotland 
succeeded better than productive cooperation, which has, 
however, met with some success. France appears to have 
succeeded better than England in productive cooperation. 
Some instances of success in the United States are recorded, 
and many undertakings have been partially successful; by 
which it is meant that they have succeeded as business 
undertakings, but have abandoned wholly or in part the co- 
operative principle. This is the case with a large stove 
foundry started as a cooperative foundry, and in which 
some workingmen or their heirs still own stock. One of the 
strikers among the workingmen in this establishment, in a 



202 Outlines of Economics. 

difficulty which arose a few years since, owned seven thou- 
sand dollars' worth of stock. The managers seemed to take 
it much to heart that he should strike, but it is hard not to 
feel a certain admiration for him, as he placed the union of 
his fellow-employees above his interests as a capitalist. A 
good example of pure cooperation is afforded by the cooper- 
ative coopers of Minneapolis, who have nearly absorbed the 
business of making flour barrels in that milling center. The 
superiority of cooperation as a business principle has in this 
case been demonstrated. Pure cooperation, when well es- 
tablished, j)revents strikes by completely identifying the 
interests of labor and capital. It stimulates energy and en- 
courages thrift. The self-interest which usually animates 
the employer alone animates all cooperators. No slighting 
of work can be tolerated, and, eye-service vanishing, much 
labor of supervision is done away with. On the other hand, 
divided councils often render the movements of a business 
clums}^, and action cannot be so quick and decisive as when 
one man acts on his own responsibility. Failures of co- 
operation have generally been due to moral defects on the 
part of workingmen. It has been difficult for them to act 
harmoniously together, and prosperity has often produced 
disintegration. Wherever cooperation has succeeded, how- 
ever, it has produced excellent effects on character. It is a 
test, but when the test is stood it reacts beneficially on the 
cooperators. It makes men diligent, frugal, intelligent, 
considerate of the rights of others, as well as their own. 
Cooperation and temperance go hand in hand, as has been 
universally observed by students of cooperation. 

Dr. Albert Shaw, American editor of the Mevlew of Re- 
views, gives this testimony in regard to the cooperative 
coopers of Minneapolis : " The coopers are emphatic in saying 
that the moral effect of their cooperative movement con- 
stitutes its highest success. It has unquestionably wrought 
a transformation in the habits of these craftsmen. They are 
no longer a drunken, disreputable guild, figuring in the 
police courts and deserving the disfavor of the community. 



Pkofit Sharing and Coopekation. 203 

They have become a responsible and respectable class of 
citizens." 

It was once thought that corporations could not succeed, 
but the inherent advantages of corporate industry after a 
long struggle have made themselves manifest, and corpora- 
tions are crushing out the individual. It is believed by some 
that the inherent advantages of cooperation will sooner or 
later make themselves felt, and that after a period of ad- 
versity, of struggle, and of slowly increasing success coop- 
eration will finally gain industrial supremacy, thus uniting 
harmoniously labor and capital and ushering in an era of 
industrial democracy. 

The Sliding Scale. — A sliding scale of wages has been 
introduced by a powerful trades union, the "Amalgamated 
Association of Iron and Steel Workers," chiefly in Pennsyl- 
vania, and it appears, until lately, to have given general 
satisfaction and to have kept the industrial peace better 
than the ordinary wages system. Wages vary with selling 
price of the product, and thus labor shares to some extent in 
the prosperity of capital. The sliding scale is also known 
elsewhere in this country and in England, and it has met 
with a good deal of favor from economic writers. 

Piecework. — This is a modification of the wage system, 
which has in it at least a suggestion of profit sharing, as the 
wage-earner receives in proportion to what he does, not in 
proportion to time spent. Payment by the piece would seem 
to be fairer for all parties, but abuses have in manufactures 
so generally been connected with it that it is opposed by 
many intelligent artisans, and careful political economists 
will be slow to give piecework unqualified a23proval. Physi- 
cians testify that by producing feverish overexertion it has 
in certain quarters shortened average life materially, and 
there is a proverb in Saxony, Germany, to the effect that 
piecework is work that murders. Piecework has frequentl}^ 
been used to break down regulations and laws limiting the 
time of work, and more frequently still to bring about a 
reduction of wages. The workers strain every muscle and 



S04 Outlines of Economics. 

nerve to earn high wages, and after a high rate of speed has 
been secured the price per piece is reduced, occasionally time 
and time again. Peculiarly cruel and aggravating cases of 
this kind have come under the writer's observation. When 
not connected with abuses payment by piece has many advan- 
tages, and is at times preferable for all parties. 

Arbitration and Conciliation. — These have accom- 
plished much for the preservation of industrial peace wher- 
ever thoroughly and honestly tried. Sometimes voluntary 
boards are appointed by employers and employees to adjust 
differences, and sometimes they are appointed by public 
authorities. The niovement for governmental and compul- 
sory arbitration will be considered in Book III. 

Differences of "Wages.— We have different standards 
of life in different occupations, consequently differences of 
remuneration whether paid as wages or salaries. What de- 
termines differences of wages of various occupations? All 
sorts of fanciful replies have been given. The differences 
are largely historical. We must go back to a man's grand- 
father or great-grandfather. Occupations where remunera- 
tion is high are so difficult to enter that few are able to 
surmount the difficulties. Peculiar and rare qualities are re- 
quired ; opportunities which come from favorable environ- 
ment ; an expensive training, which few parents are able and 
at the same time willing to give. What one is depends 
chiefly on one's parents, and, as has been often said, one has 
no voice in the selection of one's parents. We who have 
been blessed in this respect ought to feel that we owe a 
special duty to humanity. 

Adam Smith enumerated the following five causes for the 
differences of wages in different employments : First, the 
agreeableness or disagreeableness of the employments them- 
selves; secondly, the costliness or cheapness or the difficulty 
and expense of learning them; thirdly, the constancy or 
inconstancy of employment in them; fourthly, the small 
or great trust which must be reposed in those who exer- 
cise them; and fifthly, the probability or improbability of 



Profit SnARma and Cooperation. 205 

success in them. All this presupposes that grown men, per- 
fectly free to select their occupations — free not merely so 
far as the law is concerned, but free so far as their command 
of resources is concerned — look over the entire industrial 
field and choose their employment. A recent English writer, 
pointing out that occupations are selected by parents very 
generally, adds : "When a person is one of the large number 
who have been in childhood badly nourished, badly housed, 
badly clothed, badly educated, and not at all trained to any 
particular occupation, let no one prate to him of his freedom 
to choose what occupation he thinks proper. His legal free- 
dom to choose many occupations is about as much use to him 
as his legal freedom to fly with wings in the air." ISTever- 
theless, with proper qualifications, what Adam Smith says 
explains many differences in wages. It is left as an exercise 
to readers and students of this book to discover by observa- 
tion, careful and long-continued, the real amount of truth in 
Adam Smith's causes for differences of wages in different 
employments. 

"Wages and Salaries. — -The law of wages assumes a 
better form in the case of salaries where payments by the 
month or year take the jDiace of payments by the day. In- 
cidental advantages of this system of payment are : first, 
greater regularity of income, the less productive portion of 
the year being equalized with the more productive, a fact 
which, taking men as they are, is often of even more impor- 
tance than an increase of income ; and second, constancy of 
income, no deduction being made ordinarily for interrup- 
tions caused by sickness and other inevitable misfortunes, and 
vacations being often allowed. The nature of the service 
performed by salary-earners also gives them in general a 
much more favorable social position as regards their em- 
ployers. It is plain, however, that these are incidental rather 
than fundamental differences. 

Turning to the essence of the salary system in its highly 
developed form, we notice a marked tendency to regulate 
salaries not by the value of the service rendered, which is 



206 , Outlines of Economics. 

often incalculable, as in the case of an efficient public officer 
or clergyman, but by the needs of the individual. A college 
professor, a judge, a president, all are paid with almost no 
reference to the benefit they confer upon society. A man 
who enters these callings does so with the distinct under- 
standing that they will not allow him to accumulate wealth, 
but that if he succeeds they will provide for his reasonable 
wants. If we pay the President of tlie United States 
|50,000 per year, it means that we consider that the nature of 
his function requires him to spend about that amount. Many 
a judge receives only a tliird or fourth of what he received 
while practicing at the bar. This tendency to regulate com- 
pensation by needs rather than by simple capacity is in- 
creasing and is wholly good. Only so can individual genius 
be made a benefit rather than a burden to society. 

Is this principle of compensation a new law of wages ? It 
would seem, on the contrary, to be an application of the regu- 
lar law in the strictest sense, but under conditions which 
show its real character and possibilities. These wants which 
society more or less carefully considers in estimating salaries, 
what are they but the " standard of life " which is appropri- 
ate to the function in question ? Only here society does not 
so generally unite in an effort to " keep down wages " as in 
the case of the wage-earner. It recognizes, at least partially, 
that to " keep down " the standard of life of its important 
servants is to "keep down" the quality of their services in 
an even greater degree. It is in the increased recognition of 
this principle that the hope of the wage system lies. The 
principle is right. Men should receive according to their 
wholesome wants, not according to their strength. The 
latter is the law among swine. But the most indubitable 
right we possess is the right to develop our wants, for this is 
the development of our life. A maximum of wholesome 
wants with a distribution of goods in proportion to those 
wants is the economic goal of society. 



Pkofit Shaking and CoorEKATioN. 2()7 



SUMMAEY. 

1. Profit sharing is a growing and apparently feasible means of improving 
the industrial situation. 

2. A natural development leads from profit sharing to capital sharing, a 
preparation for industrial democracy. 

3. Cooperation ma}^ be compulsory by government authoritj', or voluntary. 

4. Yoluntary cooperation may be distributive (that is, commercial) or pro- 
ductive. 

5. Distributive cooperation has been especially successful in Great Eritaa\. 

6. Productive cooperation lias succeeded better in France, and lias had 
some success in Ihe United States. 

I. Cooperation requires and tends to develop high moral qualities on the 
part of co5peralors. Failures are usually traceable to a lack of these quali- 
ties. 

8. The sliding scale of wages adopted by Pennsylvania iron workers regu- 
lates wages according to tlie selling price of the product. 

9. Piecework in itself is a just method of paying wages, but has been lia- 
ble to grave abuse. 

10. ArlDitration and conciliation have been helpful in adjusting differences 
whenever honestly tried. 

II. Differences in wages are due to many causes, largely historical, all of 
which may be summed up under the social obstructions of the wage-earn- 
er's environment. 

12. Salaries are tlie best form of wages and the application of the princi- 
ple of the standard of life. 

QUESTIOI^TS. 

1. What is cooperation? How does it differ from profit sharing? What 
are the advantages of eacli system ? 

2. What is capital sharing? How does it grow out of profit sharing? 
What is its outcome? 

3. What are the advantages of industrial democracy? tlie disadvantages ? 
(Answer as thoughtfully as possible.) 

4. What kinds of cooperation are there? Which is easier? Where has 
each been most successful ? 

5. Why does cooperation so often fail? Is it likely to fail continually 
for these reasons ? Why ? 

6. What is the sliding scale? its advantages? its disadvantages? 

7. Why is piecework fair to both parties? Why do economists and labor 
organizations oppose it ? 

8. What is the advantage, and what the weakness, of arbitration? What 
conditions are needed to make it a success ? 



20S Outlines of Economics. 

9. What is tlie general reason for the differences of wages in different 
occupations ? What was Adam Smith's explanation ? ITow i\ir was it cor- 
rect? 

10. Tu what ways do salaries differ from wages ? In what ways are 
they identical ? What are the advantages of each? 

LITERATUEE. 

Gilman, N. P. : Profit Sharing hetween Employer and Employee. 
Gilman, N. P.: Socialism and the American Spirit. Chapter IX. 
Johns Hopkins University: Studies in Historical and PoUlical Science, 
Sixth Series, Cooperation in the United States. 

Jevons, W. S. : The State in Relation to Labor. Chapters Y and YI. 
Ely, R. T.: The Labor Movement in America. Chapter YII. 



CHAPTER yi. 

INTEREST AND PROFITS. 

We have considered the return which under the present 
system of distribution accrues to land and labor. These, 
taken in their broadest sense, are the only original elements 
in production. Of course, land includes not only building 
lots and farming land, but mines and rivers and fisheries and, 
in short, all portions of the earth which contribute to pro- 
duction. Labor, too, is to be taken quite inclusively. We 
now come to the third element in production, capital, which 
is not an original but a derivative element. Capital, like 
other goods, is produced, but it is produced for the purpose 
of production in turn. We are concerned here only with 
social capital, the treatment of individual capital, when it is 
not at the same time social capital, coming later, as it is then 
not a factor of production. ISTow, although capital is pro- 
duced, and not original, when it has once been produced and 
lodged in the hands of owners it acts exactly like a natural 
element having a power of its own to exact a return accord- 
ing to its own law. This return is variously known as inter- 
est, profit, and, in some languages, as rent, a term which we 
have confined to land.* Common usage calls the return to 
productive capital in the hands of an entrepreneur profit, 
while interest is the return on capital lent. This usage is 
thoroughly inaccurate, as each term partially includes the 
other, as well as one or two more elements of an entirely 
different nature ; but here, as elsewhere, it is usually easier 
to redefine old terms than to adopt new ones. We must 

* Sometimes the return to capital is called capital-rent. 



210 Outlines of Economics. 

therefore notice two or three distinct ideas commonly in- 
cluded under profits. 

There is first the pure return to capital, a return which is 
paid to the owner of capital who lends it without any accom- 
panying labor or risk. This is interest^ and it is obvious that 
it is precisely the same whether a man lends capital or uses 
it himself in business. The return on the capital is interest, 
whether there is any loan or not. We shall consider it 
under that head, though it is usually called profit when the 
capital is owned by the entrepreneur, and even the older 
economists so considered it. The second element under this 
name is the payment for risk. Every one knows that the 
revenue from a given business varies much from year to 
year. Some years it is very high, and then again there is 
little, nothing at all, or even a loss. The return for a given 
year may be entirely abnormal. If the business is to suc- 
ceed the large revenue of one year must help out the small 
revenue of another. So from the profits of any good year 
must be taken a sum to help cover past or future losses. 
This deduction from "profits" we call, for lack of a better 
word, insurance. This is exactly the right word except that 
it must not be confounded with fire insurance, etc., in which 
a policy is taken out and a definite premium paid. A tliird 
element in what is commonly called profits is really counter- 
balanced by wear and tear. The capital used has lost in 
value, and of course the loss must be made good by a fund 
for the replacement of capital. But the analysis may be 
carried still further, and for practical purposes is at times 
carried further. The entrepreneur may be paid a salary 
or allow himself a salary as wages of superintendence. This 
is, then, a fourth element. The fifth element is the entrepre- 
neur^s profit, a profit due to wisdom and productiveness of 
management. This we shall call pure profit. Sometimes 
four and five are classed together as pure profit. It is not, 
strictly speaking, a return npon capital as such, but it is con- 
sidered here because it is conventionally included under 
profit. This vague term profit, which includes these five 



Inteeest and Profits. 211 

elements, we may better designate as gross profit ^^ We 
have, then, 

" Replacement, 
Insurance, 
Gross Profit : \ Interest, 

Wages of Superintendence, 
_ Pure Profit. 

These five elements are perfectly distinguished in the book- 
keeping of many large business concerns, and in such estab- 
lishments the first three at least are kept distinct from four 
and five, if no separate account is kept for wages of superin- 
tendence. The first two obviously are not profit in any true 
sense. They represent no permanent productive increase. 
We shall therefore consider only interest and pure profit, as 
the wages of superintendence would fall under wages or 
salaries. 

Interest. — This is the real return to capital. By what 
law is its amount determined? This question has been as 
much discussed as any question in economics, and it is still a 
question which to many appears as an unsettled problem in 
economics. Perhaps few would like to pronounce any one of 
the various theories under discussion a perfect explanation. 
The ancients in general denied that interest rested on any 
justifiable law. Aristotle thought it unjust, and Cicero 
classed it with murder. Throughout the Middle Ages it was 
both condemned by the Church and prohibited by law. 
Nevertheless it continued to be a custom wherever commerce 
was developed, and with the industrial awakening of the 
modern period it was allowed of necessity. But, being 
allowed, it must needs be justified, and the explanations and 
justifications offered have been various as they have been 
unsatisfactory. Of course, these explanations have usually 

* Professor W. W. Folwell, of the University of Minnesota, in his val- 
uable syllabus of lectures entitled " Principles of Political Economy," uses 
"profit" in the sense of gross profit and defines it as follows: "Profit is the 
luiascertained share of distributed produce obtained by the managing capi- 
talist for his investment of capital, services, risk, and responsibihty. " 



212 Outlines of Economics. 

concerned themselves simply with loan interest, which is ob- 
viously only an outgrowth of natural interest or return on 
capital employed in production. This interest-profit is what 
needs explanation. The earlier economists explained the 
laws of rent and wages, and concluded that capital had what 
was left, which became thus a "residual product." Others 
have concluded that capital and land exacted returns accord- 
ing to fixed laws, and wages was the residual product. The 
truth seems to be that no one of the three is a residual 
product. A return is demanded by each according to fixed 
laws, and if there is not an assurance of such a return they 
will not join in production. The true residual product is 
the economic surplus which accrues to monopoly of any sort. 
What is the law of interest-profit? Among many answers 
two must be considered, on account of their importance, be- 
fore the more recent and, to the present writer, on the whole, 
more satisfactory theory, namely, that of Dr. von Bohm- 
Bawerk, is presented. 

Prodnctivity. — It is often said that capital in production 
is productive, and so calls for interest. Obviously, capital is 
productive in the sense that production is greater with than 
without capital ; but does this explain interest ? Without 
considering many minor difiSculties, such as the fact that 
capital draws less interest as it becomes more productive, we 
pass at once to the fundamental difficulty of this theory. 
Capital does not generally produce goods like itself. It 
produces goods eventually which satisfy human wants. 
We know why these ultimate goods have value — simply 
because they satisfy human wants. But what gives value to 
capital, which by very definition cannot satisfy human 
wants ? For instance, why should any one care for a plow, 
which one cannot eat, wear, or play with? The reason is 
clear : because it produces things which we can eat, etc. 
Their value gives value to the plow. Thus we have the 
principle that the value of capital is a reflected value; that is, 
the value of the means of production is derived from the 
product. But how much value will the plow have ? Sup- 



Interest and Profits. 213 

pose it lasts ten years, and with it are produced crops worth 
one thousand dollars. Paying all the rent, wages, etc., fifty 
dollars is left at the end of the ten yeais. Now, men learn to 
foretell these I'esults very closely, and from their estimate of 
what a machine will produce they determine its value. If it 
will produce a great deal they value it very highly; if only a 
little, they will give only a little for it, no matter how much 
or little it cost. So it does not do to say that capital draws 
interest because it produces more than its own value, for, as 
we have seen, it is valued according to uiJiat it produces. 

Abstinence. — It is also said that interest is the wage of 
abstinence. As we have seen, capital is the result of a special 
production made possible by saving. Men cannot have cap- 
ital if they consume all the goods they get hold of. It is said 
that men must be paid a certain amount to induce them to 
save, and that this is interest. This is true in a way, but it 
is perhaps not the best way to state the truth. Let us return 
to our illustration of the plow. We are convinced that it 
will bring us in at the end of ten years a clear surplus of 
goods worth fifty dollars. According to the law of reflected 
value it ought to be valued at fifty dollars, and we ought to 
be willing to forego fifty dollars' worth of satisfaction in 
order to secure it. But, as a matter of fact, we will not do so. 
Probably thirty dollars' worth of goods is all we will give for 
fifty dollars' worth of goods ten years hence. Now, to call 
the remaining twenty dollars a payment for abstinence is mis- 
leading; for, as a matter of fact, the abstinence involved is a 
very variable thing, and often there is none at all. Besides, 
we do not pay for abstinence but for results. 

Bbhm-Bawerk's Theory of Interest. — Why will not 
men give fifty dollars for fifty dollars ten years hence (all 
risk, etc., being covered by insurance) ? Simply because de- 
sire, the source of value, is stronger for things near than for 
things far away. Human experience in a thousand lines 
proves this. The wants of men are like Esau's hunger. He 
would rather have (that is, he values higher) a mess of pottage 
Qxow than a whole inheritance in the future. Distant enjoy- 



214 Outlines of Economics. 

ments are vague to men's minds, while near ones are vivid 
and tempting. Think of this as we will, it is a universal fact. 
Thus it is that a man will not give j)i'esent goods for future 
goods in like amount, because /*«^w/"<3 goods are less valuable 
than present goods. Fifty dollars now is worth perhaps 
fifty-three dollars a year hence, and eighty dollars ten years 
hence. 

When we consider interest in its ethical asj)ects much 
more can be said than the limits of the present work will 
permit. It must not be supposed that an absolutely correct 
theoretical explanation of interest would have changed the 
attitude of Moses, Aristotle, Cicero, and the sages of the 
past with respect to it. They seem to have desired certain 
things with which the receipt of interest was calculated 
to interfere. One of them was mutual helpfulness. Loans 
were desired in the past preceding the era of capitalistic pro- 
duction chiefly to relieve distress, or possibly to purchase 
tools for an artisan. They were not then designed to in- 
crease the earnings of great entrepreneurs or captains of 
industry, as is now often the case. It appears also to have 
been the desire of many of these wise men of old that oppor- 
tunities to gain a livelihood without j)ersonal exertion should 
be reduced to a minimum, and private receipt of interest 
undoubtedly makes it possible to enjoy an income without 
personal exertion. Ethically all that we have, as well as all 
that we are, must be used for the benefit of society as a 
whole, ourselves included; and all this introduces further 
considerations. There is on the part of some an effort to 
make a distinction between loans to relieve distress or to 
help the young to get a start in life, and loans to be used in 
productive enterprises like manufactories or railways, and to 
lend money without interest in cases of the first kind, but to 
take interest in cases of the second kind. This would seem 
to accord with the spirit of the teachings of the Bible and 
of the older philosophers. 

The Rate of Interest. — There is a real and an apparent 
fluctuation in the rate of interest. The apparent fluctuation 



Interest and Pkofits. 215 

is due to the inclusion of insurance with interest in a single 
rate. All are familiar with the fact that loans on good 
security can be had at a lower rate than others. This simply 
means that a man who takes some risks as to getting his 
money back adds to the interest a premium to cover this 
risk. Loans for long time are also cheaper because the 
lender runs less risk of having his money lie idle than if he 
makes frequent short loans, and saves himself the trouble of 
reinvestment. Aside from these changes a steady diminution 
of interest occurs in most civilized countries. This change, 
Avhich is not due to lessened risk, marks a change in men's 
valuations of future goods. Present w^ants, being better 
satisfied, are less clamorous and contrast less vividly with 
remoter wants. Men gain confidence in the future and esti- 
mate its possibilities more justly, or at least more favorably. 
The lowering of the interest means that men are less needy 
in the ^^resent or more appreciative of the future, than before. 
Pnre Profits. — In contrast with the routine of system- 
atized industry where all returns are paid out to landlord, 
laborer, and capitalist, and just sufiice to secure their partici- 
pation, we see concerns here and there which accumulate a 
surplus over and above the profits of their rivals in the same 
lines of business. They do business under the same condi- 
tions, make the same goods, and sell to the same public as the 
other firms; yet they have a surplus profit, wdiile the others 
have none. Every one knows that such things happen. 
Thus, the so-called "merchant prince," A. T. Stewart, 
maintained a business which distanced all competitors and 
which could not be maintained after his death. Not un- 
frequently a business depends so entirely on exceptional 
abilities for its surplus profit that when these abilities 
disappear business relapses to its former level of ordinary 
returns. In other cases the improved management is con- 
tinued until rival concerns learn the secret, competition low- 
ers prices, and the surplus disappears in a cheapening of eco- 
nomic service to society. Thus the achievements of genius 
constantly tend to become an addition to social skill. But 



216 Outlines of Economics. 

until they have become so special abilities command a rent 
precisely as does special productivity in land. We may call 
this surplus of pure profit a brain rent as the other is a land 
rent. They are governed by the same law except that 
genius is not fixed in amount, like land. Added to these 
rent-producing powers of productivity and ability is a certain 
element of chance (conjuncture) which affects incalculably 
the result in particular cases, such as the accidental discov- 
ery of a mine or a process which equally enriches their lucky 
possessor ; the outbreak of war and any combination of 
events fortunate for the individual fall under this head. 
Such elements can be enumerated and described only so far 
as the individual is concerned. They cannot be reduced to 
any assignable principle and interfere as disturbing elements 
with the operation of general principles. They are, however, 
of great importance in the distribution of wealth, making 
many rich and also impoverishing others. The broad social 
standpoint reduces chance to a minimum, for irregularities 
counterbalance each other when we consider great masses of 
facts or large areas. The poor wheat crop of one section is 
accompanied with an unusually large yield elsewhere, etc. 

Monopoly Profits. — We have seen that under competi- 
tion pure profits rest upon a precarious foundation. If the 
special abilities on which they rest are such as cannot be 
duplicated they perish with their single possessor ; if they 
can be duplicated rival concerns are sure to duplicate them, 
and the special advantage is lost through competition. But 
there are advantages entirely equivalent to these which may 
become the exclusive property of a concern and make com- 
petition impossible. Such are the possession of those par- 
ticular locations or privileges upon which a business depends, 
the right of way of a railway, the privilege of supplying a 
city with gas, electricity, water, transportation, etc. Under 
such circumstances competition is usually not possible, and 
never permanently successful. The business becomes a 
monopoly by its very nature if not by distinct legal privilege. 
The restrictive power of competition over price is removed, 



Interest and Profits. 217 

and a surplus over rent, wages, and interest, and profit, in the 
true sense of the word, is now a regular result. Unless 
interfered with by legislation there would seem to be nothing 
to prevent a monopoly asking any price it pleases. It is a 
mistake, however, to suppose that a monopoly price has no 
economic limits ; for increase of price tends to lessen con- 
sumption, and a point is soon reached where an increase of 
price is more than compensated by a decreased sale. This 
point is the natural limit of monopoly price, and gives us its 
law. Monopoly price is that price which yields the greatest 
sicrplus. Tliis will vary very much with the article. Some 
will bear raising the price much more than others without 
serious decrease of sale. The monopoly price loill rise and 
the monopoly surplus increase as wealth and willingness to 
spend increase in the commimity. It is thus that monopoly, 
without any effort on its own part, shares in the increasing 
wealth of the country and absorbs a large part of it. It is, 
for example, among other things, the larger wealth and 
greater willingness to spend freely which make monopoly 
more profitable in the United States than in Germany. 

It is to be noted that while pure profit, apart from the 
gains due to a happy combination of affairs (conjuncture), 
is largely a surplus produced by genius, and is in so far no 
burden to the community which tends to profit by it even- 
tually, monopoly profit is a surplus extorted by power and 
privilege, and invariably a loss to the community. Distri- 
bution of wealth comes increasingly under the influence of 
monopoly. The economic surplus yielded by monopoly is 
the source of many of the largest fortunes of our day, and is 
the prime cause of the growth of inequalities of fortune 
during the present century. While in general competition 
increases in severity^ an increasing proportion of the industrial 
field is withdrawn from co^npetition and falls under the con- 
trol of monopoly. There is thus a groici?ig class enjoying 
specicd economic privileges. 

Monopolies will be further considered in Book III. 



218 Outlines of Economics. 



SUMMARY. 

1. Capital is the third factor in production, a derivative element but 
wholly comparable in its action to natural elements when once produced. 

2. The return to capital is usually known as interest or profit. 

3. The total surplus left in the employer's hands after wages and rent, 
are paid must include: 1.) Replacement of capital; 2.) Insurance against 
loss; 3.) Wages of superintendence ; 4.) Interest on capital; 5.) Pure profit. 

4. Interest has been explained as due to the productivity of capital — in 
oversight of the fact that capital derives its value from what it produces. 

5. The explanation of interest as a payment for abstinence is inadequate. 

6. Interest is the result of the fact that future goods, on account of 
their present inaccessibility, liave a lower value than present goods. 

7. The former condemnations of interest arose partly from a misconcep- 
tion of its nature, partly from a ditference of conditions. 

8. The rate of interest lends to fall as affluence and intelligence lessen 
the disparagement of future wants. 

9. Pure profit is a rent, usually temporary, paid to managing ability. 

10. Monopoly profit is a rent paid to advantages of opportunity, as loca- 
tion, privilege, etc., when exclusively controlled by individuals. 

QUESTIONS. 

1. What is the difference between capital and the other factors of pro- 
duction ? Does this materially affect its operation ? 

2. What is usually included under " profits? " Define each. How many 
of these elements may be properly called profit or increase of wealth ? 

3. What is the productivity theory of interest? its error? the abstinence 
theory? its defects? the theory of Bohm-Bawerk? Does a man pay more 
value than he receives when he returns a loan with interest? Why? 

4. What two changes are there in the rate of interest ? the cause of each ? 

5. Why was interest once condemned ? Is it always right to-day ? Why ? 

6. What is pure profit? Why unstable? Does it become more stable? 

7. What is monopoly profit? What are its limits? Has it any connec- 
tion with pure profit? What is its character as regards social welfare? 

LITERATURE. 

Bohm-Bawerk, E. von : Capital and Interest^ for a criticism of former in- 
terest theories is an ideal of logical and judicial criticism. Positive Theory of 
Capital by the same writer presents his own theory. 

Walker, P. A. : Political Economy. 

Mill, J. S. : Principles of Political Economy. 

Clark, J. B. : Philosophy of Wealth. 

All standard works on Political Economy treat these topics. 



PAET IV. 

CONSUMPTION, 



CHAPTER I. 

INTRODUCTORY. 

Consumption is the correlate of production. As we said, 
man creates no new matter ; lie also destroys no matter. 
Matter constitutes things. By man's activity, and sometimes 
without it, things acquire the power to satisfy human wants 
and become goods. By man's activity, and sometimes with- 
out it, goods lose their power to satisfy wants and become 
things. To make things into goods with a view to satisfying 
wants is production ; to make goods into things by satisfying 
wants is consumption. 

It is easy to distinguish production from the mere hap- 
penings due to human caprice on the one hand, and from 
the unaided workings of nature on the other; neither of 
which can be called production. But it is necessary to use 
more care in defining consumption. The term is one of that 
unfortunate class which is used loosely in ordinary speech, 
and must be made exact for scientific purposes. 

In the first place, consumption does not include the passage 
of goods back into things by the simple action of nature, 
such as the rotting of apples, the dying of timber, animals, 
etc. Such goods perish, but they are not consumed in 
the economic sense. A more difiicult distinction is that be- 
tween consumption and destruction, both of them the result 
of human activity. All difiiculties are solved, however, if 
we keep in mind the simple fact that the satisfaction of 



220 Outlines of Economics. 

human wants is the purpose and the measure of all economic 
activities. Wood burned in a stove is consumed, because it 
satisfies wants ; burned in a conflagration, it is only destroyed. 
Moreover, a good may satisfy certain wants and still be 
destroyed, as when we warm a house by burning furniture. 
This satisfies wants, to be sure, but wants which are less than 
those which furniture may satisfy. If we break up a stove 
into old iron we still have a good, but one farther removed 
from the satisfaction of wants than the good from which it 
was made. All processes which destroy or diminish possible 
utilities are destruction, not consumption. 

On the other hand, we must guard against an opposite 
error. We are apt to have certain personal notions of the 
desirability of certain wants, and to say that goods are 
destroyed or wasted when devoted to uses which we do not 
approve. Thus we say that corn used for food is consumed, 
while corn used for whisky is destroyed. Such a judgment 
may be morally right, but it is wrong economically. A 
want is a want, and in economics wants are measured only 
by their intensity as regards their economic validity. The 
very fact that whisky is made indicates that a certain num- 
ber of " wants " can be better satisfied by corn whisky than 
by corn bread. It is undoubtedly better for a man to burn 
his furniture to warm his house than to sell it to buy drink, 
but economically the one is destruction and the other con- 
sumption. All of this merely means that man is more than 
a wealth-getting animal. Economic interests are not his 
only interests, nor always compatible with his other interests. 
The economist by no means claims that economic considera- 
tions should always be followed. He knows full well that 
economic wisdom may be human folly, and that life is con- 
tinually neglected in order to get a living. Economics must, 
however, consider the reactions of wants and their satisfac- 
tion upon economic activities. We must also avoid the error 
of supposing that consumption means the rapid using up of 
things. We often think that some goods are consumed while 
others are only used. The distinction is one of degree only 



Introductory. 221 

All products are used up at last, and whether soon or late 
makes no essential difference for present purposes. Houses 
are consumed as truly as food. Consumption means nothing 
more than using things in the way they were economically 
intended to be used. The using up or wearing out is merely 
an inevitable incident of this use or consumption. 

Productive and Final Consumption. — Having de- 
fined consumption, we have now to notice two kinds of con- 
sumption, or, more exactly, the consummation of two kinds of 
goods. These are capital and consumption goods, or goods 
designed to satisfy wants directly. Machines and raw mate- 
rials are consumed as truly as finished articles. The differ- 
ence is that they are consumed to produce, while the others 
are consumed to satisfy wants. Hence we call this produc- 
tive consumption, while that consumption which attains the 
ultimate goal of economic activity in the satisfaction of 
wants is final consumption. 

It is necessary again to guard against the idea that food 
consumed by laborers is productive consumption. All such 
questions are to be settled by the consumer himself, who has 
final rights in the matter. He consumed not for the sake of 
production, but for the sake of satisfaction, and produces 
only that he may consume. Man is ourjioial term. 

It goes without saying that only final consumption is of 
any real importance to life. This is the goal of our effort, 
the measure of our success. Heterogeneous estimates of un- 
consumed wealth mean little or nothing as to a nation's well- 
being. How much is the final consumption of the nation in 
a year ? This is the important question in this connection. 

Alleged Present Consumption of Future Products. 
— We often hear of consumption in advance of production. 
It is said people live on the future. It is frequently argued 
that during our late war we were consuming faster than we 
were producing. It is alleged that the federal bonds repre- 
sented the consumption of future earnings. Those who talk 
thus appear to have no clear notions. It is impossible to 
consume faster than we produce unless we consume past 



222 Outlines of Economics. 

savings. We cannot eat to-day the wheat or potatoes of 
to-morrow, nor can we wear coats before they are made. 
What is alleged can only be true in case the capital or other 
wealth of the country is diminishing, whereas during our late 
civil war it increased. What really happened was this : We 
as a nation became indebted to some extent to foreigners, and 
within the nation some of us gained while the rest of us were 
losing. Bonds do not represent a present consumption of fu- 
ture wealth, mit a consumption of existing wealth for which a 
government agrees to remunerate its owners in the future. 
If war can be carried on with the aid of bonds it can — leav- 
ing out of consideration what foreigners send us — with a 
sufficiently perfect taxing machinery, conceivably always 
and practically sometimes, be carried on without bonds. It 
is only a question of how to get hold of existing wealth. 
War was formerly carried on without bonds, because they 
are a comparatively recent contrivance. Consumption can 
never anticipate future production ; it can only anticipate 
future ownership. 



Introductory. 223 



SUMMARY. 

1. Consumption is the correlate of production, the change of goods into 
things through tlie satisfaction of wants. 

2. Consumption is to be distinguished from destruction which changes 
goods into things with a partial or complete failure to satisfy wants. 

3. Consumption is not to be restricted to the satisfaction of morally justi- 
fiable wants. 

4. Consumption is either productive or final, according as it results in the 
production of more goods or in the satisfaction of wants. 

5. There is no such thing as present consumption of future goods, though 
future ownership may be anticipated in consumption. 

QUESTIONS. 

1. Define consumption. What is the difference between consumplion and 
production ? between consumption and destruction ? 

2. What is the difference between using things and using them up? Is 
the question involved in consumption, and if so, how ? 

3. Wliat is the relation of consumption to the problem of good and bad 
wants? 

4. Define production and final consumption. 

5. What is meant by the present consumption of future goods ? 

LITERATURE. 

Patten, S. X. : Tlieory of Dynamic Economics ; The ConsiLmption of Wealth ; 
Premises of Political Economy, and numerous articles and monographs. 
Roscher, Wilhelm : Political Economy. English translation. Book IV. 



CHAPTER II. 

CONSUMPTION AND SAVING. 

What has been said in no way invalidates, but rather 
emphasizes, the importance of saving in connection with con- 
sumption. To be sure, we save only in order that we may 
have more to consume. Saving as a mere end in itself is 
penuriousness, a most degrading and demoralizing passion. 
But the efforts of man to produce goods are so inefficient un- 
less he is aided by capital, which is impossible without pre- 
vious saving, that he who does not save consumes his seed- 
corn, which is his hope of next year's harvest. It is difficult 
to say at what point consumption should stop and saving 
begin. The rule will vary for individuals and nations. Un- 
doubtedly both persons and peoples have erred on either side 
at various times, now living in squalor to accumulate wealth, 
now spending their substance in riotous living until there is 
a famine in the land. There is not much to choose between 
these two vices. They both amount to the same thing in 
the long run, namely, a low average consumption and repre- 
hensible poverty of life. Difficult as it is in practice to 
settle this question, the principle itself is very clear. So 
micch, and only so much, should he saved as will maintain a 
maximum final consumption over long periods of time. 

Inducements to Saving. — We have seen that men in 
general prefer a future good to a present one only when it is 
larger in amount. To provide for old age or for possible 
accidents may be a sufficient motive for saving in some cases, 
but most men will not save unless the goods saved will bring 
an increase. It is, therefore, necessary to an extensive sav- 
ing that the conditions of profitable investment should be 
provided ; and if wealth is to be widely diffused opportuni- 



Consumption and Saving. 225 

ties for investment must be readily accessible. It is a per- 
ceived opportunity to make an investment with probability 
of increase which stimulates saving above everything else. 
Such an opportunity is often the beginning of individual 
accumulation. Some of these conditions we have now to 
consider. They may be grouped under two heads, security 
and productiveness. If the investments of a country pro- 
duce well on an average, but fluctuate between loss of prin- 
cipal on the one hand and unreasonable profit on the other, 
the condition is one to encourage speculation rather than 
saving. On the other hand, general security of investment 
will promote saving with a very low j)i'ofit and of course in- 
creasingly as profit increases. Among the institutions to be 
considered are: 

Private Property. — The abuse of the system of private 
property by those who use it selfishly and oppressively is so 
common that if we look only at that side we may be tem23ted 
to conclude that it should be abolished. But over against 
the abuse must be set the advantages of the system of which 
the foremost is the encourascement it selves to savinc»*. 

Stock Companies. — These are but an extension of the 
principle of division of labor. How much better it is for 
each man to do the thing he can do best and leave other 
functions to others is clear in connection with labor. Our 
experience has made it clear in connection with management 
as well. How few men know how or could ever learn how 
to manage a railway ! On the other hand, there are multi- 
tudes who could contribute something toward building one. 
Stock companies combine those two powers, the ^^ower of 
saved-up wealth and the power of exceptional ability in 
management. Few institutions of our day offer greater 
possibilities in the way of encouraging saving than these 
companies. It must be said, however, that these possibilities 
have as yet been only imperfectly realized. These invest- 
ments have in general been j)rofitable, but by the speculative 
nature of their management the security of such investments 
has been almost destroyed. No severer indictment can be 



226 Outlines of Economics. 

brought against the stock gambling of our day than the fact 
tliat it has destroyed one of the most efficient incentives 
which society possesses for the general saving of wealth. 
Wlio would dare advise a poor widow to invest her savings 
in railway securities ? Yet no property in the country is 
more evenly or certainly productive than many of our rail- 
ways. The difficulty is due to a lax sentiment and lax legis- 
lation affecting all stock companies alike, which permits a 
kind of management little superior to piracy. Such robbery 
does not simply steal the golden egg ; it kills the hen that 
lays it. 

Savings Jianks. — These have a noteworthy influence upon 
saving, especially among the poor. It is here especially 
that encouragement to saving is needed. The rich, who least 
need to save, are most apt to do so, not simply because they 
have most to save from, but because they have most induce- 
ment to do so. The poor, on the other hand, as we all know, 
and as we are over-fond of asserting, are poor in large part 
because they are thriftless. With weak wills and clamorous 
wants they know poorly how to keep money in the house 
unspent. So " flush " times bring reckless expenditure, and 
hard times bring distress. Savings banks, especially in 
Europe, have done much to promote thrift among the poor. 

Insurance. — This relatively modern institution is already 
one of the most valuable factors in our economic civilization. 
It has the great merit of providing in varying proportions 
for both security and profit of investment. The provision 
for security is especially prominent in the case of fire insur- 
ance. It is often said that such an insurance is simply an 
equalization of losses, or a distribution of a heavy sudden 
loss over a long period of time. In fact, it is much more 
than that. It is important to take the amount of a loss from 
a business in such amounts and at such times that no vital 
want is left unsatisfied, and this is done by insurance. Thus 
perpetuity and equality of conditions is guaranteed to a busi- 
ness in such a way as to greatly encourage investment. The 
same principle applies to life insurance. The death of a 



CoNsuMrxioN AND Saving. 22T 

business man is often a more serious shock to a business than 
a conflagration. The payment of a life insurance policy is 
often a very great relief to the financial embarrassments in 
which such a business is left. 

But the addition of the endowment feature by which a 
policy becomes payable at the end of a stated period greatly 
adds to the other feature of life insurance, namely, the profit 
of investment. An able business man who devotes his time 
to the management of his investments will find in the low 
rate of interest guaranteed a small inducement, and will 
probably insure simply to guard against risk. But there are 
multitudes who are not able business men — })rofessional men 
and others who do not spend their time in making and manag- 
ing investments. To such it is easy to save the amount of a 
year's premium. It is difficult or impossible to invest that 
small amount profitably or to avoid spending it during a 
long period of years. Tlie insurance company collects these 
myriad trifles, and by the employment of able investors 
profitably invests them. We can scarcely overestimate the 
importance to society of an institution which equalizes the 
shocks and multiplies the incentives to thrift and whole- 
some economic activity. 

Some idea of the magnitude of the insurance business may 
be obtained from the fact that there were in 1887 in the 
United States 532 life insurance companies with 5,383,050 
policies in force, $630,913,768 gross assets, and insuring lives 
to the amount of $7,506,027,211, or nearly 13 times our in- 
terest-bearing national debt. This, it must be remembered, 
includes only a single branch of the comj^lex insurance busi- 
ness.* 

Cooperation. — Cooperation in all its forms is an incentive, 
not only to industry and good work, but also to saving. 
The principal difficulty with it is that it requires some saving 
before it can be started ; but once in operation its incentives 
are increasingly felt and appreciated. Nothing is so neces- 
sary to the development of thrift as a flexible element in a 
* Publications of the American Statistical Association. Vol. i, p. 146. 



22.^ Outlines of Economics. 

man's income varying with thrift. Perhaps cooperation bet- 
ter than any other agency makes a man feel the immediate 
results of saving. This is especially true when the necessary 
capital is in the form of stock which can be owned in large 
or small amounts, according to savings invested. Coopera- 
tive stores have been especially successful in England, and 
while cooperation has been found more difficult in produc- 
tive industries, there are numerous examples of its successful 
application. 

Governments and Capital Formation. — It is to be 
noticed that governments are more or less pi-ominent in 
capital formation. When our federal government pays off 
the national debt it forms capital. The means to pay the 
debt are collected in small sums from millions of people who 
would not have used them for purposes of production, and 
then the aggregate is handed over to the owner of a written 
obligation, a bond, who uses them as capital. These means 
in the pockets of the people were not capital, and only a 
small proportion would have been turned into capital. 
There can be no doubt that debt payment by the United 
States has increased the actual capital of the country. A 
part of this new capital, it is true, simply restored capital 
that hnd once existed and had been sacrificed years before. 
Similarly, when the United States expends its revenues for 
post office and other federal buildings, and for wdse internal 
improvements, it increases capital. It is a consumption 
which is at the same time a capital formation. When mu- 
nicipalities establish gas works, electric lighting works, and 
pay for them by taxes or by loans repaid by taxation, the 
capital of the country is increased. The people save a por- 
tion of their income through the agency of government, and 
it is the only way a large proportion of them can ever be 
made to save anything. 



Consumption and Saving. 229 



SUMMABY. 

1. Saving should be so proportioned to final consumption as to maintain 
a maximum final consumption over long periods of time. 

2. The inducements to saving are primarily security and productiveness 
of property. 

3.. Stock companies combine managing ability and saving ability, virhicli 
are not naturally united to a large extent. 

4. This system has offered the inducement of productiveness, but has de- 
stroyed that of security through speculative management. 

5. Savings banks greatly increase saving among the poor, 

6. Insurance offers both inducements in a high degree and is the great 
modern capital creator. 

7. Cooperation is highly productive of incentives to saving. 

8. Through taxation and wise investment government contributes largely 
to the formation of capital. 

QUESTIONS. 

1. Is saving always a virtue ? If not, what are its limits? What is the 
difference between saving and penuriousness ? 

2. Wliat two inducements are necessary to saving? 

3. What are the advantages of stock companies ? their disadvantages ? 
Are the disadvantages inherent? 

4. What are the advantages and disadvantages of private property as re- 
gards saving ? (Note both sides ) 

5. What is the effect of savings banks upon saving? 

6. Why does insurance promote saving ? What is the advantage of equal- 
izing losses ? Is life insurance a good investment, and why? 

7. What is the effect of cooperation and capital sharing upon saving? 

8. Are we always " out of pocket " as a result of government expendi- 
ture ? Why ? 

LITEKATURE. 

See works already cited. 
16 



CHAPTER III. 

LUXURY. 

Luxury is the name of a vague something which society 
has always viewed with a sense of mingled tolerance and 
condemnation. We must know what is signified by the term 
before we know what to think about it. Many and various 
definitions have been offered not wholly satisfactory. With- 
out decrying these definitions we will try to get at the popular 
conception underlying the word. In the first place, it is 
clear that people ordinarily consider as luxuries many things 
in themselves innocent and desirable, silk dresses, jewels, 
pictures, etc. ISTo one but an ascetic will condemn as wrong 
in themselves things that appeal to taste and the finer appre- 
ciations, and yet we feel that the use of such things is often 
unjustifiable. Second, the popular idea of luxury recognizes 
a difference in persons. We cannot help condemning in one 
person what we approve in another. Third, we judge luxury 
differently at different times. There is a continual transfer 
of articles from the list of luxuries into that of comforts and 
necessities. This transfer is brought about by the consensus 
of social judgment, and is increasingly acquiesced in by all. 
So we see that the term luxury does not apply to goods of a 
certain character, but to certain goods in their relation to 
time and person. We may define luxury simply as excessive 
cotistcmption. But what determines whether consumption is 
excessive or not? The answer to this question is connected 
with the problem of the distribution of wealth. 

Two facts are prominent. First, the distribution of wealth 
is enormously unequal. This needs neither proof nor elabora- 
tion. Second, the ability of men to use wealth profitably 
is enormously unequal also. There is not tlie remotest proba- 



Luxury. 231 

bility that the latter inequality can ever be removed. Men 
must ever differ, not only in the nature of their wants and 
appreciations, but also in their aggregate amount. Should 
wealth be equally distributed ? Remembering that owner- 
ship means simply control over goods, let us put this question 
in a simpler form. Should the wealth of a family be owned 
or controlled in equal shares by its different members ? Be- 
fore we hastily answer yes let us ask what this would mean. 
Can the two-year-old control his part of the family fortune 
as well as his father ? Can he appreciate or profitably use 
rare books, pictures, and. fine furniture, to say nothing of 
capital, to anything like his numerical proportion ? Plainly 
not. How much may he claim? First, he may claim as 
full a satisfaction of his tcatits as is accorded to the rest; 
second, he may claim as good an opportunity to develop his 
loants as is accorded to the rest. So much he may indubitably 
claim 1)}^ the law of the solidarity of the family, which is the 
epitome and type of the solidarity of society — a law which 
lies far deeper and broader than all other laws, at the very 
bottom and foundation of things. 

Returning to our larger problem, Ave ask. How much may 
a man consume ? As much as he can lay hold of ? We 
must again remind the reader that tliis is the law among 
swine. As much as every other man? The result would be 
an immediate and disastrous impoverishment of society. 
How much, then? The only justifiable law is that already 
enunciated for the family. He may consume in proportion 
to his power to appreciate and utilize. To consume more 
is to limit correspondingly the right of some other man. 
There is no possible reason why goods should be distributed 
alike to every man. To do so would be to use goods where 
they satisfied trifling wants or none at all — a use which, as 
we have said, is not consumption, but destruction. 

But, while such a form of injustice has never been perpe- 
trated, an opposite form is exceedingly common. A?i ine- 
quality of consumption is demanded on the basis of simple 
justice, but not the inequality which exists. To consume dis- 



232 Outlines of Economics. 

proportionately to one's wants or one's likelihood of devel- 
opment is to destroy or to consume with relatively small 
returns, and is a wrong to society. The excessive consump- 
tion which constitutes luxury is therefore a consumption in 
excess of man's fundamental claims, which are in general, 
Jirst^ the right to as full a satisfaction of wants as can he ac- 
corded to all ; second^ the right to as free a development of 
his vKtnts as can be enjoyed by all. 

Greater inequalities are admitted than would seem to be 
the case on first thought. The wants of a king are very 
great, and these wants are true, legitimate wants, upon the 
satisfaction of which depends the welfare of society. The 
wants of those engaged in the learned professions are greater 
than are ordinarily understood. The higher scholarly, lit- 
erary, or artistic work often involves large expenditures. 
Travel is important for those doing this kind of work, and 
books are indispensable. What is often thought of as 
luxurious expenditure is simply an outlay which is an in- 
dispensable part of the price society pays for the product. 
Professors in American universities, for example, frequently 
are not able to satisfy their wants sufficiently to give society 
work of the highest sort of which they are capable. 

The rule given is one which looks at consumption largely 
from the standpoint of individual enjoyment as the result of 
consumption. When we view the consumption of the indi- 
vidual as a condition of social service a certain modification 
may be necessary, especially if the entire social product is 
not great enough to allow all to develop their faculties com- 
pletely. It is unquestionably in the interest of society that 
those with the highest capacities should be allowed to attain 
the fullest development of all their powers, provided these 
powers are used in the service of humanity. A dispropor- 
tionately large consumption of the individual may be praise- 
worthy, provided this consumption is for the real develop- 
ment of powers designed to be used " for the glory of God 
and the good of man." 

While then justifiable consumption will, according to these 



Luxury. 233 

principles, be exceedingly variable, can anyone for a mo- 
ment claim that such principles now govern social con- 
sumption ? Immense sums are squandered on passing caprices 
which do not correspond to any really felt want. On the 
other hand, multitudes of fine natures with keen apprecia- 
tions and large capacities for development and present enjoy- 
ment are left without the means for either. So long as 
these things exist, so long as a vast amount of the world's 
wealth is destroyed by vulgar and incompetent consumption 
which might impart satisfactions of a high order if consumed 
otherwise, and by others, the moral sense of the world will 
condemn luxury as a social wrong. 

And what is the excuse for this abuse? Usually the 
simple fact of ownershij). " It is ours," they say. But for 
what ? Simply because the interests of production require 
capital to be massed imder specialized control. The few 
who are able to manage capital must be allowed to mannge 
it ; and management means control. But the many who have 
wants must have those wants satisfied, and that satisfaction 
means the right of consumption, a right proportioned to 
those wants. There is no more reason why a millionaire 
should consume all the wealth he controls than there is why 
a philosopher or an artist should withhold from society the 
satisfactions afforded by his genius. A successful manu- 
facturer once expressed the opinion that a man had a right 
to put down silk velvet on a muddy crossing to walk on if he 
were rich enough to afford it. When a man tramples in the 
mire the fruit of human industry he tramples w^ith it human 
rights and humanity, and should expect humanity to avenge 
the affront. It needs no prophet to foresee that men must 
learn to own their property for the good of society, or society 
will own it for them. The right of private property, like 
other social institutions, is ever on trial. The obsolete objec- 
tion is still sometimes urged that luxury gives employment 
to labor. Does not philanthropic and productive expendi- 
ture do the same ? But that is not the question. What 
comes of the employment ? The payment of wages only 



234 Outlines of Economics. 

helps men to get more of existing goods — at the expense of 
others among whom the goods are divided. It may help 
workmen to get goods away from others, to give them em- 
ployment ; but the only way to hel]3 society is to give work- 
men useful employment, to aid and encourage them to pro- 
duce needful goods. Every employment of labor whicli 
encourages the production of luxuries is a misdirection of 
social energy, an encouragement to society to spend its 
money for that which is not bread and its labor for that 
which satisfieth not. Excessive consumption is necessarily 
wasteful consumption, and as such is necessarily reprehen- 
sible. There can be no kind of doubt as to the teaching of 
Christianity on this subject. 



Luxury. 235 

SUMMARY. 

1. Luxury is a vague conception, differently applied according to 1imo 
niid person. Tt is the excessive consumption of wealth. 

2. Consumption sliould be proportioned wants and capacity for develop- 
ment. Consumption beyond this is excessive and unjustifiable. 

3. Equal distribution of wealth would result in a most unwise consump- 
tion of goods. 

4. Ownership and the necessary centralization of capitalistic control are 
no measure of the right to consume. 

5. Luxury cannot enrich a community by giving employment to labor be- 
cause it misdirects productivity. 

QUESTIONS. 

L What is luxury? What is the popular idea? How does it vary ? 

2. What may each man justly claim as a consumer? Why may he not 
justly consume all he can get ? May he justly consume all he can produce ? 
Why? 

3. What would be the result of an equal distribution of wealth? Why? 

4. What objection can be raised to our present distribution of wealth ? 
Why? 

5. Should capital and consumption goods be distributed according to the 
same rules ? Why ? 

LITERATURE. 

Ely, R. T. : Social Aspects of Christianity. 



CHAPTER IV. 

HARMFUL CONSUMPTION. 

We have been careful to avoid the impression that luxury 
consists in the use of pernicious goods. It is a common 
query, " Why should I not have this if it does me no harm ? " 
This we have tried to answer in the previous chapter. It 
amounts to the same thing as harm if an innocent but insig- 
nificant satisfaction prevents the accomplishment of a greater 
good. A luxury may be a positive good in itself, a satisfac- 
tion which society may well hope to make general, but it is 
a good which society cannot yet afford because other and 
greater wants are yet unsatisfied. It is a satisfaction per- 
mitted ahead of its time. 

But we have to consider a kind of consumption which is 
objectionable in an entirely difierent way, not because it is 
excessive or premature, but because it is intrinsically harmful. 
It would be a violation of all language to call the use of in- 
toxicating liquors a luxury in general, but it is certainly on 
the whole harmful. As we have said before, these wants 
are as really economic as any other, and we have no intention 
of assuming the function of the physiologist or the moralist 
in enumerating the evils which come from the consumption 
of certain goods. But in one resj)ect we have a distinct part 
in this discussion. All production is for the sake of man, 
and consumption is its final term. But in turn man is the 
principal factor in production, and as the consumption of cer- 
tain goods affects him the result is necessarily transmitted 
to the productive process. We have anticipated this prin- 
ciple in speaking of the influence of the standard of life on 
the efficiency of labor. Now, experience clearly demonstrates 
that the consumption of certain goods unfits men for efficient 
production. This is, therefore, an economically harmful con- 



Harmful Consumption. 23Y 

sumption. Whatever may be said for this consumption from 
other standpoints, the economist must deprecate it. All such 
consumption as lessens bodily vigor, blunts the perception, and 
in any way detracts from the delicacy of the human organism 
is of this sort. Of course, no complete enumeration is possible, 
but certain cases readily suggest themselves. The magnitude 
of this harmful consumption, however, is enormous. 

First in the list, of course, comes intoxicating beverages, 
especially distilled liquors. According to government reports 
there were consumed in the United States in the year ending 
June 30, 1890, of distilled sj)irits 87,829,562 gallons ; of wines 
28,956,981 gallons, and of malt liquors 855,792,335 gallons, a 
total of 972,578,878 gallons. This was an average of 15.53 
gallons for every man, woman, and child in the country. 
The increase in amount is not less striking. In 1875 the 
amount per inhabitant was only 6.86 gallons. Since 1886 
the amount j^er inhabitant has increased almost exactly one 
gallon per year. The number of men engaged in the business 
of manufacturing these liquors, not including, of course, those 
who produce the raw materials, is stated by the same report 
to be 900,808. 

Of course we cannot tell just how much was paid by the 
consumers for this immense flood of intoxicants, which, if 
poured together, would fill a channel twenty feet in depth, 
twenty feet in width, and fifty-four and one half miles long ; 
but many estimates have been made both by those who de- 
fend and those who oppose the use of alcoholic liquors. 
They place the cost at from 1700,000,000 to 11,000,000,000. 
If we deduct that part used in the arts, and for other pur- 
poses besides that of drinking, it is probable that the first 
estimate, namely, 1700,000,000, is not too high a figure to 
represent the amount of money that is yearly ])aid for in- 
toxicants which are used ns beverages. This is equal to 
an expenditure of about 111 for every man, woman, and 
child in our country. 

In comparing the amounts expended for these liquors Avith 
what our people expend for other purposes there have been 



238 Outlines of Economics. 

many misleading estimates made which in the long run can 
be of no real service to the cause of temperance. For instance, 
some persons in comparing the cost of drinks with the cost 
of all the food consumed in the United States have placed 
the former at the not extravagant amount of about 
1900,000,000, but the cost of food thej find to be only 
1963,000,000. At this estimate the cost of liquors would 
be $15 per capita, while the cost of food would be only 
$16 for every man, woman, and child in the United States. 
There is an important difference overlooked, namely, that 
nearly all of the liquor consumed comes on the market and 
is there estimated in dollars and cents, while perhaps less 
than one fourth the food consumed is brought under the 
conditions necessary for a money valuation. 

It is important to note that if the 1700,000,000 now 
spent for grain in the form of liquors were expended for 
food and other farm products to satisfy the rational 
wants of the thousands of families who are rendered desti- 
tute by intemperance it would purchase at least seven 
times as much grain in the form of flour as it does in that of 
liquor ; because it is true with regard to liquors, as with all 
luxuries, that the amount of raw material used in their pro- 
duction is far less, compared with their cost to the consumers, 
than it is in any of the other products that satisfy human 
wants. Thus we can see that those farmers who think that 
the liquor industry creates a demand for their commodities, 
and those brewers and distillers who endeavor to instill this 
belief, are both deceived and deceivers. How much better 
it would be if farmers could secure high prices for their grain 
and other products by ministering to those rational and 
higher wants which strengthen human nature and enable the 
consumers to produce in turn a greater abundance of wealth, 
rather than by satisfying the demands of base appetites that 
degrade men and lessen the community's wealth-producing 
power ! It is, of course, obvious that if men spend less for 
liquors, tobacco, opium, and the like, they will have so much 
more to spend for other things, and the opportunities for 



Harmful Consumption. 239 

employment will not be at all lessened. On the contrary, as 
other expenditures are more likely to be productive, oppor- 
tunities for employment will inevitably be multiplied. 

The indirect cost of intoxicating beverages to the commu- 
nity at large is far more tremendous and impossible of esti- 
mation than the direct cost. We all have to pay for the 
support of the armies of j)olicemen, detectives, lawyers, judges, 
whose chief occupation grows from the use of intoxicants ; 
for prisons, penitentiaries, insane asylums, almshouses, fifty 
to eighty per cent of whose occupants are the victims, direct 
or indirect, of intemperance ; while all share in the loss of in- 
dustrial power that comes from weakened contitutions, dizzy 
heads, and extravagance. Many books and articles have 
been written and many public speeches have been made upon 
these manifold and visible evils. Those who suffer the most 
from drink are the working classes, and they are also those 
who cannot conceal their excesses and misfortunes. But it 
is a mistake to suppose that workingmen alone furnish the 
drunkards, or that there are not great numbers of earnest 
temperance men among them. The rich have their social clubs 
where intoxicants perform their work as heinously as they do 
in the gutters, but less publicly. Almost the only social 
men's clubs in the United States without a bar attached are, 
so far as the writer has observed, workingmen's clubs. These 
appear to be generally devoid of that institution. There are 
few fashionable club houses in the United States where intoxi- 
cating beverages are not sold. While intemperance is a 
monstrous evil, and cannot be too earnestly fought against, 
we should not fail to see that it is at the same time both an 
effect and a cause. When we look for the worst effects of 
intemperance we go to our crowded cities and great indus- 
trial centers. But here we find industrial and social con- 
ditions which force us to believe that, until they are remedied, 
we can look for no lasting growth of temperance or strengthen- 
ing of character: on the one side, immense wealth, with its 
temptations of pride and luxury ; on the other, crowded 
tenements, hot and noxious in summer, always loathsome and 



240 OlTTLINES OF ECONOMICS. 

repulsive, occupied by those who do not know whether they 
will find work that day or not. Their condition is often the 
effect of their former intemperate habits, and in turn it drives 
them and their children into further depths of inebriety. 
An important reason for the craving for intoxicants, as is 
shown by one of the foremost of American physiologists, is 
the lack of sufficient food or of a sufficient variety of whole- 
some food, and especially poorly cooked food. These and 
many other facts with regard to the economic conditions of 
our day admonish us that the thoughtful temperance advocate 
must embrace in his efforts both temperance and industrial 
reforms. 

Another serious waste of wealth results from the use of 
tobacco. In 1886 there were 743,460 acres of land devoted 
to the production of this weed, and the quantity of cigars, 
cigarettes, and cheroots consumed by the American people in 
the year 1880 reached the enormous number of 2,821,776,282. 
In the year 1892 (fiscal year ending June 30) there were 
put upon the market for consumption 4,601,525,650 cigars 
and cheroots, and 2,896,407,763 cigarettes, a total of 
7,497,933,413. The tobacco that was consumed by chewing 
and in the form of snuff was, in 1880, 136,275,835 pounds, 
and in 1892 the amount put on the market in the United 
States was 265,522,329 pounds. The indirect loss resulting 
from the use of tobacco is not so great, nor are its effects 
upon the consumers so disastrous as is the case in the con- 
sumption of intoxicating drinks, but it is at least doubtful 
whether the enormous outlay shown by the above figures is 
compensated by any increased happiness of the people. 

The opium habit is said to be rapidly growing in America. 
Its effects are even worse than those of alcoholic intemper- 
ance, destroying both the mind and body and transforming 
its victims from productive members of the community into 
a public burden. 

There are other objects of foolish and harmful consump- 
tion which will suggest themselves to any thoughtful per- 
son. 



Harmful Consumption. 2-il 



SUMMARY. 

1. Harmful consumption is that which demoralizes the consumer and 
lessens his economic efficiency. 

2. The principal harmful consumption is tliat of intoxicating beverages 
and tobacco. 

3. The^er capita consumption of each is increasing in the United States. 

4. In comparing this consumption with that of food it must be remem- 
bered that a large part of the latter does not come on to the market. 

5. The indirect cost to the community is greater than the direct cost. 

QUESTIONS. 

1. Is luxury harmful consumption? "Why? 

2. Is all harmful consumption luxury? Why? 
,3. Wliat is the ultimate destiny of the two? 

4. What is the amount of intoxicants sold in the United States ? Of 
tobacco ? The value of each ? 

5. How does it compare with food consumed ? What is the difficulty of 
comparison ? 

6. Wliat is the indirect cost of this pernicious consumption? 

LITERATUHE. 

Mitchell, Kate, M.D. : Tlw Drink Question. 

Eiohardson, B. W., M.D. : Ten Lectures on AlcoJiol. 

Kerr, Norman, M.D. : Jaebriety, its Etiology, Fathology, Treatment, and 
Jurisprudence, 

Clum, Franklin D., M.D. : Inebriety, its Causes, its Results, its Remedy. 

Cyclopedia of Temperance and Frohibition. 

The Voice, of New York. An organ of prohibition. 

The Union Signal, of Chicago. The organ of the National Women's 
Christian Temperance Union. 



CHAPTER Y. 

CRISES AND ANALYSIS OF CONSUMPTION. 

Crises. — Crises are attended with a glut in the market, 
and it is said that they are caused by overproduction. A 
French economist, M. Jean-Baptiste Say, however, has de- 
veloped what is called a theory of the marhet, which has 
quite generally been accepted by economists. It is that 
there is no such thing as overproduction, and never can be 
until all wants are satisfied. He says that the remedy for 
ap]3arent overproduction is more production. Men bring 
commodities to the market. What do they desire? Not 
money, says Say, but commodities, money being a mere 
medium of exchange. Kow we have already seen that a 
consumer is a producer. If there is a deficiency of con- 
sumers it must be because those who would like to consume 
have not produced economic goods for exchange. Overpro- 
duction, so called, is really underproduction, according to this 
theory. There is a large measure of truth in this theory. 
When are we most troubled with a glut in the market ? 
Undoubtedly when least is produced. When is there the 
most ready sale for commodities ? Undoubtedly when every- 
body is at work, or when most is being produced. 

There is, however, another side to the question. It is 
quite possible to produce a larger quantity of some com- 
modities, as 23otatoes, cotton, cloth, etc., than people need. 
More railways are often produced than tlie people need at 
the time. The effect of disproportionate production is that 
some commodities cannot be exchanged. Those who have 
produced them do not make their normal purchases. There 
is a falling off in sales of some other commodities, and 
among those engaged in producing these other wares some 



Ckises and Analysis of Consumption. 243 

cease to produce. Demand again falls off, and still others 
cease to work, as already explained. There is dispropor- 
tionate production and overproduction of some things, and 
finally general overproduction, owing to underconsumption, 
due in turn to lack of purchasing power. 

The intervention of money is an important factor. Un- 
dou'itedly commodities are in the end exchanged for com- 
modities, but the intervention of a medium of exchange 
produces weighty consequences. Commodities are in the 
first instance exchanged for money, and all liabilities must 
be met in money. Houses, lands, etc., can only indirectly 
pay debts, and at times cannot rescue one from bankruptcy. 
Changes in money supply, esj)ecially a contraction of the 
volume of money, will render it impossibel for producers to 
meet their engagements; production will begin to diminish, 
demand will begin to decrease, and the result is apparent 
general overproduction. 

Remedies for overproduction or underconsumption, which- 
ever one may choose to call it, are many. Whatever im- 
proves industrial society in any respect is a partial remedy. 
It is especially desirable, however, to bring producer and 
consumer as near together as possible, because it often hap- 
pens that mutually desired products cannot, as a matter of 
fact, be exchanged. Obstructions to trade should be re- 
duced to a minimum where they cannot altogether be 
removed. 

Analysis of Consumption. — An analysis of the con- 
sumption of individuals, families, and societies is most in- 
structive. An analysis of the expenditures of a family is 
called a family budget. Dr. Ernst Engel, the former dis- 
tinguished head of the Prussian Statistical Bureau, has 
advanced the theory that it might be possible by a careful 
study of a sufficient number of family budgets for a period 
of years to construct a sort of social signal service. His 
idea is that changes in total expenditure and in expenditures 
for various items in a sufficient number of typical families 
could enable us to predict the coming of industrial storms. 



244 



Outlines of Economics. 



The theory has not, so far as the writer is aware, ever been 
fully worked out, but the thought is suggestive. 

The following tables, copied from the Report of the Massa- 
chusetts Bureau of Statistics of Labor for 1885, are worthy of 
careful examination : 

ENGEL'S LAW— PRUSSIA. 



Items op Expenditure. 



1. Subsistence 

2. Clothing 

3. Lodging 

4. Firing and Lighting 

5. Education, Public Worship, etc.. 

6. Legal Protection 

7. Care of Health 

8. Comfort, mental and bodily recre- 

ation 



Total 



Percentage of the Expenditure op the 
Family op 



f^a^ 




■fi:& 


PI 


bcg^ 


IS 


cS^ 




1.0 J 



100.0 



IPII 

■m" =S ° ^ 



90.0 



Per cent. 
55.01 
18.0.1 
12.0 ( 

5.0 J 

3.5 

2.0 

2.0 y 10.0 



2.5 



100.0 



ai oo 73 .y _. 
S n o ^10 



Per cent, 
50.0 
18.0 
12.0 

5.0 

5.5^ 

3.0 

3.0 

3.5 



85.0 



15.0 



100.0 



" The foregoing table demonstrates the points upon the 
strength of which Dr. F^ngel propounds an economic law. 

"The distinct propositions are: 

" First. That the greater the income the smaller the rela- 
tive percentage of outlay for subsistence. 

" Second. That the percentage of outlay for clothing is 
approximately the same, whatever the income. 

" Third. That the percentage of the outlay for lodging or 
rent, and for fuel and light, is invariably the same, whatever 
the income. 

* In the original table this item was 1.5. The present chief of the Bureau, 
Hon. Horace G. Wadlin, kindly writes to the author that in his opinion it 
should be as given above, which makes the total correct, and this preserves 
'• tlie regular progression of item 8 in the three columns." 



Crises and Analysis of Consumption. 



245 



" Fourth. That as the income increases in amount the per 
centage of outlay for sundries becomes greater." 

MASSACHUSETTS.— PERCENTAGES OF EXPENDITURES.— AMOUNT, $754.42. 



Items of Expenditure. 


Mass. Budgets, 

1883. 


Engel'sPrussian 
Law. 


Mass. Bureau 
Table, 1875. 


Average. 


Subsistence 

Clothing. . . . 


49.28 
15.95 
19.74 
4.30 
10.73 


50.00 
18.00 
12.00 
5.00 
15.00 


56.00 

15.00 

17.00 

6.00 

6.00 


51.76 
16 32 


Rent 


16.25 


Fuel 


5.10 


Sundry expenses 


10.57 


Totals 


100.00 


100.00 


100.00 


100.00 







COMPARATIVE PERCENTAGES OF EXPENDITURES BY THE FAMILIES OF 
WORKINGMEN IN ILLINOIS, MASSACHUSETTS, GREAT BRITAIN, AND 
PRUSSIA. 



Items op 
Expenditure. 


Illinois. 


Massachu- 
setts. 


Great Britain. 


Prussia.* 


Average. 


Subsistence . . . 

Clothing 

Eent 


41.38 
21.00 
17.42 
5.63 
14.57 


49.28 
15.95 
19.74 
4.30 
10.73 

100.00 


51.36 
18.12 
13.48 
3.50 
13.54 


55.00 
18.00 
12.00 
5.00 
10.00 


49.25 

18.27 
15.66 


Fuel 


4.61 


Sundries 


12.21 


Totals 


100.00 


100.00 


100.00 


100.00 



These tables will help us to understand the social troubles 
of our time. They show that the amount which workingmen 
have for all the higher wants and for health and recreation 
is still extremely small. Civilization develops the higher 
wants, but the improvements of the distributive processes of 
industrial society have not kept pace with the developmemt 
of these wants. 

* It is to be noted that for Prussia a family of the intermediate class is 
taken. 

17 



246 Outlines of Economics. 



SUMMARY. 

1. Crises are periods of arrested industry attended by gluts and apparent 
overproduction. 

2. Overproduction means really uneven production resulting in impeded 
exchange. 

3. The remedy is to remove the obstacles to trade. 

ENGEL'S law (for PRUSSIA). 

4. The greater the income the smaller the relative percentage of outlay 
for subsistence. 

5. The percentage of outlay for clothing is approximately the same, 
whatever the income. 

6. The percentage of outlay for lodging and rent, fuel and light, is in- 
variably the same, whatever the income. 

7. As the income increases in amount the percentage of outlay for sun- 
dries becomes greater. 

QUESTIONS. 

1. What is a crisis ? A glut ? "What is the popular explanation of the 
latter? 

2. What facts are opposed to this explanation ? What kind of over- 
production is possible ? Wliy ? 

3. What is the remedy for a crisis ? 

4. What is meant by Dr. EngePs theory of a social signal service? 

5. What are his four laws ? Do they apply universally ? 

6. Compare in detail the expenditures of Prussian and American families 
as given in the tables. 

LITERATURE. 
Say, J. B. : Political Economy, American edition, Book I, Chapter XY, 
" On the Demand or Market for Commodities." 



BOOK 111. 



PUBLIC ECONOMICS. 



PART I. 

PUBLIC INDUSTRY AND THE RELATION OF 
THE STATE TO PRIVATE ENTERPRISE. 



CHAPTER I. 

INTRODUCTORY. 

We said in the opening of Book II that the difference 
between public and private economics was not wholly a dif- 
ference between enterprises, but very largely a difference 
between parts of the same enterprise. There is no such 
thing as a purely private enterprise, and we may perhaps say, 
also, that there is no such thing as a purely public enter- 
prise. Certainly in the vast majority of the enterprises with 
which we are familiar private and public activities are com- 
bined in varying proportions. Let us take the case of an 
industry which is as nearly private, perhaps, as any we can 
find — that of agriculture — and notice the part which public 
activities play in securing the farmer's result. First, we say 
that the farmer owns his own farm ; this is private property. 
But how comes it that the farm is his ? Why does not a 
stronger man drive him off and take the farm himself ? 
Plainly because the State, which is the organ of public 
activity, protects him in the possession of his farm. When 
he bought the farm he took his bill of sale or deed to a 
government official, who recorded it and thus gave him an 
official guarantee of possession. A neighbor's dog kills his 
sheep, and an appeal to the State compels the neighbor to 
redress the grievance. Another, far below, dams a river and' 
backs the water up so that it overflows his land. Another 
appeal to the State removes the dam or secures damages. 



250 Outlines of Economics. 

When wheat is raised the farmer hauls it to market ; but 
how is this made possible ? By a road built, not by private 
but by public activity. The railway lowers the price of his 
wheat by a discriminating rate, and again government inter- 
feres in his behalf. 

So much for the protections of government, the list of 
which could be greatly extended. But there are exactions 
as well which profoundly aifect the farmer's economic activ- 
ity. He has mortgaged his farm and does not pay. The 
sheriff appears and sells it to another man. Taxes are levied, 
and again if he does not pay his property is sold and the 
amount of the tax appropriated by government. An infec- 
tious disease breaks out among his cattle, and in spite of his 
protest they are slaughtered under public authority, and he is 
paid, not his own but an appraiser's price. A railway is 
built across his farm and, unwilling though he be, his land is 
taken and an appraiser fixes the price. This list, too, might 
be greatly extended, but enough has been said to show that in 
a highly organized State public activities are inextricably in- 
terwoven with private activities, and that any such thing as 
independent and unlimited private control is out of the ques- 
tion. The industry of agriculture, which we have seen to be so 
largely dependent on government for its benefits, and respon- 
sible to it for its obligations, is after all one of the most thor- 
oughly private industries in existence. The farmer is free to 
make any bargain he pleases with his laborers, the manufac- 
turer often is not. He can build as he pleases ; the dweller 
in the city cannot. If he hauls a neighbor's wheat, he can 
charge what he pleases, the railway cannot ; and so on indefi- 
nitely. 

Thus we see that all enterprises are the result in part of 
public activdty, and also that the part played by this public 
activity is different in different industries. We may lay it 
down as a general principle that, as society becomes depend- 
ent upon the individuals in control of an industry, it pro- 
tects itself hy State activity. The different forms of State 
activity will be examined later. 



Inteoductoey. 251 

It is important for us to conceive clearly at the outset the 
exact subject of our inquiry. We are not concerned 
merely with State revenues or with the few industries which 
the State has taken entirely under its control, but with the 
partial control which the State exercises over all industries. 
Considered thus, public economics covers all the ground 
which we have examined under private economics. It 
concerns rent, wages, interest, etc., because it has a part in 
determining all these things. It affects profoundly all the 
fundamental economic processes of production, exchange, 
distribution, and consumption, which we studied under pri- 
vate economics. We study the same facts as before, but 
we study a different set of causes. 

The State. — Without going into the question of what 
constitutes a State it will answer our purpose here to notice 
the extent of the conception as we use it. We in the United 
States are familiar with many kinds of government. When 
we speak of "the government," we generally mean the 
federal government, with its seat at Washington. Then 
comes the State government, then the city, the county, the 
township, and the school district. Each of these has its own 
governing to do, and is backed up in the doing of it by all 
the governments superior to it. Now, it is entirely an acci- 
dent with us that out of these half dozen forms of govern- 
ment only one, and that not the highest, is known as the 
State. In nearly every other country the governmental 
divisions most nearly corresponding to our States are known 
by some other name — departments, provinces, etc. When we 
use the term in the present work we never mean a State in 
our American sense unless that meaning is specified, but 
any society acting through gover7iment. Local governments 
are, of course, only branches of the main government. So, 
when a school district hires a school-teacher, or a township 
mends a road, or a city builds water works, or a " State " 
builds a penitentiary, or the federal government builds a 
post office, all these are State activities in the scientific sense 
of the word. So, too, when we speak of State intervention 



262 Outlines of Economics. 

we may be talking about the township or the city or the 
general government. These are only difierent ways of exer- 
cising one and the same kind of power — that of organized 
government. 

The Nature of State or Public Activity. — The laws 
which we have considered under private economics operate 
for the most part unconsciously. A law regulates with force 
the wages of workmen, but neither workmen nor employer 
in general know why wages are as they are. Men lend 
money or goods, now for one price, now for another, but 
few know why they demand interest or why the rate 
changes. These processes go on visibly before us, but the 
governing laws are hidden except to the careful investi- 
gator. In this respect they are like the laws of physiology. 
We all eat and digest our food, but how many people know 
how or why digestion takes place ? The laws of this private 
social economic activity are largely of this sort, spontaneous 
and unconscious. 

The laws of public activity are, on the contrary, conscious 
and volitional. When we decide to make a law or levy a 
tax we do it consciously, considering arguments, and finally 
will the thing in question. Individual citizens may not real- 
ize what is going on, but the men composing the govern- 
ment know what they are doing and why they are doing 
it. Some people are inclined to call those spontaneous and 
unconscious forces which we have compared to digestion 
natural^ as contrasted with these efforts to modify results 
consciously, which they would call artificial or even unnat- 
ural. One objection to this is that unobserved it prejudices 
all our conclusions. It is of the utmost importance that we 
should understand what is natural to man. 

We are all aware that nature and natural are vari- 
able terms. Is it natural for animals to swim ? That de- 
pends on the animal ; for beavers, yes; for cats, no. Is it 
natural for beings to be governed by unconscious laws or 
instincts? That depends on the being; for cattle, yes; for 
men, no. Is it natural for men to divide goods on the basis 



Intkoductort. 253 

of selfishness, or "grab what you can?" For some men, 
yes, but not for all; in some stages of development, yes, but 
not in all. Plainly, that is natural in human conduct which 
is in accordance with the nature of man. What kind of a 
nature has man ? We can answer at least in part. Is man 
a selfish animal ? Certainly. Is he a social animal ? Un- 
doubtedly. Is he a thinking animal? Unquestionably. Is 
he a moral animal ? Beyond a doubt. Few will question 
that all these elements are contained in human nature and 
that their diversity explains the perpetual warfare in the in- 
dividual life. If selfishness is necessary to the beginning 
of life it is inadequate to its completion. Selfishness never 
makes a man. We must add the social nature, teaching men 
to act ioi concert j the intellectual nature, teaching them to 
act consciously; the moral nature, teaching them to act 
rightly. When a man defends his greed on the ground that 
it is " human nature " all he means is that it is his nature, 
that greed is natural to those who have not developed be- 
yond the barbarian stage. Concert, consciousness, and con- 
science are as natural to the ultimate man as greed is to the 
primitive man. It was the mistake of Rousseau and his 
school to confound the primitive with the natural. They 
said, " Back to nature." They should have said, " Forward 
to nature." We have noted a tendency to increase j^^^ttlic 
activities as civilization develops. This may now be stated 
in another way. As men come into closer and more vital 
contact loitli each other their activities tend to become social, 
conscious, and ethical. By no means all of this tendency cul- 
minates in governmental action, but much of it does so, and 
whatever we may conclude as to the wisdom of such action 
we must not beg the question by calling it unnatural. 

We have dwelt thus at length upon this point because 
while no one urges that the long-established activities of 
government are unnatural or artificial every proposal to ex- 
tend these activities is tacitly or openly opposed on these 
grounds. It is generally objected to a law limiting the 
hours of labor that it is unnatural, as if a free scramble were 



254: Outlines of Economics. 

the natural condition of society. Whether such a law be 
wise or not we shall consider later; but one thing is certain, 
it is 7iot unnatural. If the social and ethical elements in 
human nature are to dominate more and more the isolating 
instinct of selfishness, we must certainly expect as a natural 
result more associated action, more thoughtful action, more 
action for the common welfare. 

The State as an Instrument of Associated Activ- 
ity. — It must be remembered that associated activity, far 
from being confined to government, is rather the rule than 
the exception in private enterprise. We have now corpora- 
tions for railways, for commerce, for manufacture, for educa- 
tion, for evangelization, for charity, for almost every under- 
taking known to modern life. As these corporations increase 
in permanency, magnitude, and power to accomplish their 
purpose they approach increasingly to the character of in- 
dependent governments. The question to-day is not between 
individual action and associated action, but between" differ- 
ent kinds of associated action; that of the corporation and 
that of the State. Without anticipating here a discussion 
which must receive our careful attention later, we may notice 
briefly certain characteristics of the State which distinguish 
it from private corporations. 

1. The scope of State action is necessarily great. A private 
society may in some respects do better charity work than 
the State, but nothing in its nature guarantees that it will 
cover the whole field. That which is undertaken by the 
State must usually be undertaken comprehensively and 
apply equally to all parts of its territory. 

2. The power of the State far exceeds that of any corpora- 
tion acting under its authority. Great corporations some- 
times seem omnipotent, and they exercise an enormous and 
pernicious influence over legislation itself, but they can by 
no means command the resources and power of the State 
under which they operate. 

3. The State acts for all citizens, while corporations in 
general act for a few and not unfrequently sacrifice the 



Introdijctoky. 255 

interests of tlie rest. It must be remembered, however, in 
limitation of this statement that the disinterestedness and 
impartiality of State action is by no means what it should be. 
There is a constant tendency on the part of the governing 
class to manage government in the spirit of private enter- 
prise, for their own sake and the sake of personal favorites. 
Under despotic government the " divine right of kings," 
which, properly interpreted, conveyed a correct idea, some- 
times degenerated into the " divine right " of private owner- 
ship on the part of the monarch. Louis XIV of France, 
who better than any other monarch of recent times repre- 
sented this despotic principle, said on an important occasion, 
"lam the State;" and he carried out his theory. Govern- 
ment under such a theory is an entirely untrustworthy 
instrument of social action. Unfortunately, however, under 
such circumstances j)rivate enterprise is apt to be equally 
corrupt. Its only advantage is that it is usually much less 
powerful for mischief. This private ownership idea is now 
thoroughly discredited in theory, tliough the spoils system in 
American politics shows its tenacious survival in practice. 
Its presence unquestionably greatly reduces confidence in the 
State and efficiency in State activity. Few will doubt, how- 
ever, that public enterprise is conducted far more with a 
view to the welfare of all than private enterprise which is 
confessedly managed in the interest of a few. 

4. The State in its activity may enlist private services. The 
private citizens in cooperation with public servants in various 
branches of the public service is one of the distinguishing 
characteristics of excellent administration in modern times. 

It follows from the foregoing that the State is most effi- 
cient in the management of interests that are general, exten- 
sive, slow in bringing returns, and dangerous as tools of 
private interest. It is least efficient in the management of 
interests that are special and sectional, and of those which 
require minute supervision but do not convey dangerous 
power to private hands. 



256 Outlines of Economics. 



SUMMARY. 

1. Public industry includes the part played by the State in private in- 
dustry as well as the entirely public industries. 

2. All private industries are largely dependent npon pubhc activity. 

3. All private industries are subject to demands on the part of the State. 

4. The State is society acting through government. 

. 5. State activity is conscious and volitional in its laws, while private 
activity is governed by laws which are largely unconscious. 

6. State activity is as natural, though not as primitive, as private activity. 

7. Associated activity is displacing individual activity, leaving us only 
the choice between the State and private corporations. 

8. The State has greater scope, greater power, greater impartiality, and 
can more readily enlist private activities than any private agency, 

9. The State is fitted for the management of interests that are general, 
extensive, slow in bringing returns, and dangerous as tools of private in- 
terests. 

10. The State is ill fitted for the management of interests that are sec- 
tional and special and which require minute supervision. 



QUESTIONS. 

1. Define public industry; private industry. Do they involve different 
phenomena ? 

2. In what two ways are private industries dependent upon the State ? 

3. Define the State; its two meanings; which meaning is intended here? 

4. Is pubhc activity natural or artificial? PCxplain fully. 

.5. What choice is open as to means and methods of industry? 

6. What are the advantages and disadvantages of the corporation as con- 
trasted with the State? Of the State as contrasted with the corporation? 

7. What interests are adapted to State management? To private man- 
agement? Why? 

LITERATUHE. 

Adams, H. C. : Relation of the State to Industrial Action. 
Ely, R. T. : ProUems of To-day, Chapter XYII to the close. 



CHAPTER 11. 

FUI^DA MENTALS— THE RIGHT OP PRIVATE PROPERTY. 

By far the m®st important economic function of the State 
is the establishment and maintenance of* those fundamental 
laws which underlie all private economic activity. Only the 
briefest statement of these is possible within the limits of an 
elementary work. 

Private Property. — This is a right so fundamental in 
our modern life that we scarcely think of it as a creation of 
man maintained by constant vigilance on the part of the 
State and subject to human modification. Still less, perhaps, 
does it seem to us a right open to question. It seems like 
bed rock, an ultimate right, needing no other justification 
than its own obviousness. If we feel thus, however, about 
the right of private propert}^ or ownership it is only because 
we are dominated by present and local customs rather than 
by the facts of history or reason. We do not intend to im- 
peach the right of private ownership, but it is a right which 
may as fairly be called in question as any other and must 
justify itself in the same manner. When a custom has ob- 
tained very widely and is deeply rooted in human life there 
is often a tendency to claim it as a " natural right." By a 
natural right men usually mean a right which is arbitrary, 
which is a right because it is a right, and " that's all there is 
about it." There are no such rights. All true rights are 
rational rights, rights which can show good reason for their 
claims and can justify their existence on the ground that 
they promote human welfare. 

There is no 2Jossible basis of human right except human 
loelfare. To claim that certain rights are ultimate without 
reference to their effect on society is to beg the question, and 



258 Outlines of Economics. 

has been well characterized as " dogmatism in disguise." It 
is characteristic of unscientific and superficial thought to talk 
much of natural rights, and it is an encouraging sign that in 
our day such rights are subjected more and more to searching 
scrutiny. It is, therefore, as scientists rather than as icono- 
clasts that we should inquire into this time-honored right of 
private property. 

1. Begi7%7iing of the Right. Looking back into history we 
discover first that private property did not always exist. 
The savage at first owned nothing. Doubtless when he had 
caught or killed an animal he considered it more or less his, 
though even here it was the common property of the family 
or tribe rather than his own. Beyond this there were no 
property rights as we now understand them. Doubtless 
there were struggles for the possession of hunting grounds, 
but the victor's sense of ownership or i^ight was little better 
developed than that of a victorious lion or buffalo. From 
these insignificant beginnings the right or sense of ownership 
has grown, including more and more articles and dividing up 
the ownership more and more, until at last nearly everything 
is owned and nearly everybody owns something. Not until 
the agricultural stage did land become property, and the 
last forms of tribal ownership have not yet everywhere dis- 
appeared before individual ownership. 

2. Strengthening of the Right. The next thing that im- 
presses us is that private ownership has not always been 
so extensive or so exclusive as at present. We have seen 
already that the institution of private property has been ex- 
tended to many things which were at first free goods. It is 
equally noticeable that the right of ownership has grown in 
intensity and exclusiveness. This is especially marked in 
the case of individuals whose claims as opposed to those of 
the tribe were at first slight and vague ; but they gradually 
grew, especially in the case of the chieftain, until tribal or 
communal rights broke dow^n before them. The time w^as 
when a Scottish clan had absolute right to the territory they 
occupied, and no chieftain, however powerful, could have 



Fundamentals— Right of Private Property. 259 

abridged that right. Now there are beautiful tracts of coun- 
try in Scotland which are almost denuded of their agricul- 
tural population because the owners, the descendants of these 
same chieftains, have preferred to raise game rather tlian 
men on their estates. All are familiar with the general lib- 
erty allowed in this country of hunting and fishing on pri- 
vate estates, which in Europe is unheard of. Slowly, how- 
ever, we are beginning to extend, our claim to game and fish 
also, and this leniency of ownership is disappearing. 

Limitations of tlie Right by and in Behalf of the 
State. — 1. Taxation. We next notice that the right of 
ownership, though tending toward absolutism as between 
individuals, yet never reaching absolutism even as between 
private persons, has never been anything like an absolute 
right as regards the guarantee of the State. The State has 
always reserved certain rights over private property, and 
while ov/ners have gotten increasing guarantees of protection 
against other individuals they have been obliged to make 
increasing concessions to the State. Taxation, for instance, 
as understood to-day is a comparatively recent right. Dur- 
ing the Middle Ages the right to take private property for 
the support of the State was stoutly resisted, and there was 
a strong tendency to regard taxation in the modern sense as 
extortion. It was in part a survival of this mediaeval sj^irit, 
which made our forefathers so averse to British taxation and, 
later, to taxation by their own government. ISTow the right 
of taxation is universally admitted. This is the first, the 
most universal and the most serious limitation imposed upon 
the right of private property by and in behalf of the State. 

2. Eminent Domain and Requisitions. The next limita- 
tion is the right of the State to appropriate specific j^ieces of 
property with direct compensation to the owner. This is 
done especially in time of war, when all kinds of supplies 
are seized and payment made as government sees fit, regard- 
less of the owner's wishes. In time of peace such purchases 
are seldom necessary, though the right always remains. In 
one most important particular, however, this right is in almost 



260 Outlines of Economics. 

constant exercise, that is, in regard to land. As applied to 
the purchase of land this is known as the right of "emi- 
nent domain," which simply means that the State's claim 
to land is paramount. Transactions involving the exer- 
cise of this right are not simple seizure, as is the case wdth 
taxation, but genuine sales, wdth this important difference, 
that they are compulsory. These two rights are exceedingly 
comprehensive. The State may appropriate any portion of 
the property of its citizens without compensation, so long as 
it takes from all alike. It may farther buy any man's prop- 
erty to any extent at an appraised valuation and without his 
consent. 

Limitations of the Hight by the State in Behalf of 
Individuals. — We have now to notice still farther limita- 
tions placed by the State upon the right of projoerty not now 
in its own behalf but in behalf of individuals. The first is 
the right of eminent domain exercised in behalf of individ- 
uals or private corporations. We have seen that private 
property has been more and more guaranteed against private 
trespass, but while the individual is thus prohibited from 
seizing another's property he may in certain cases get the 
State to seize it for him. This is illustrated in the building 
of railways. Railways in this country are built by private 
enterprise, but their right of way is secured by the right of 
eminent domain. This is simply a necessity, as no railway 
could be built Avithout it. Added to this is the vast system 
of legal limitations to the use of jmvate property with which 
we are familiar. Nothing is more fallacious than the notion 
that the right of owners! lip allows a person to do as he pleases 
with his property. Undoubtedly a man's property rights 
have often been so defined as to admit of much abuse, but it 
has been the tendency of the State to so limit the right as 
to exclude abuses, and such limitation is necessary to secure 
private property against attacks. Whenever a given right 
of property has proved to be generally unfavorable to the 
welfare of society government has modified or abolished the 
right or jeopardized its own stability by a failure to do so. 



Fundamentals — Eight of Private Propekty. 261 

Historical Cause of Private Property. — If we ask the 
reason of private property we must distinguish between two 
things, the cause of private property in the past and the 
justification of it in the present. We will first consider the 
cause of private ownership. If we take the case of the sav- 
age who captures an animal, the chieftain who appropriates 
the land occupied by his tribe, the nation which dispossesses 
another nation, and ask the origin of ownership in each 
case we shall find it to consist in conquest or force. Prop- 
erty was owned simply because those who held it had the 
power to exclude others from the enjoyment of it. But how 
does this ow^iership come to be right? Simply by long 
continuance. The Normans held northern France at first 
by the most unjust force ; afterward by the justest of rights. 
Hardly anyone will deny that the original wanton seizure 
was unjustified ; but surely all will admit that after the 
lapse of centuries any attempt to expel the descendants of 
the invaders w^ould be the grossest of wrongs. But how can 
a wrong become the basis of a right ? Simply by a change 
in the conditions of human well-being. This brings us to 

The Justification of Private Property. — It is not cor- 
rect to say that a wrong ever becomes the basis of a right. 
A violent seizure never in itself justifies ownership. Noth- 
ing can be more perilous than for the owners of hereditary 
rights to rest the justice of their claim upon its j)ast origin. 
Few titles of long standing could be traced back very far 
without disclosing at some point violence or craft or fraud 
which the moral sense of the community would condemn. 
The dead past should not be urged either in justification or 
condemnation of existing institutions. They must he judged 
by their relation to present and future icell-heing, and by that 
only. Thus the seizure of Normandy was a wrong. It 
rudely disturbed the conditions of social w^ell-being. For 
a similar reason the later retention of Normandy was right. 
Human life had adjusted itself to the conditions resulting 
from former w^'ong, and any disturbance of these conditions 
for the sake of old scores would have been a sacrifice of 
18 



262 Outlines of Economics. 

human well-being and a wrong. Any attempt to rectify- 
past wrongs when the disturbed equilibrium has been re- 
stored is an attempt to gather up spilled milk. 

Should Private Property be Retained ? — Those 
familiar with socialist doctrines are prepared for such a 
question, although the modern socialist does not propose to 
abolish private property altogether, but only in the instru- 
ments of production, as we shall presently see when we come 
to discuss socialism. In view of what has been said the 
question may be put in another way : Does private owner- 
ship promote the welfare of society — not the welfare of the 
owner simply, but the welfare of society as a whole ? If it 
does not, then there can he no question ; private property 
should cease. The fact that I have long owned a thing, and 
that my father and grandfather owned it before me, is no 
reason why I should continue to own it. Of course we 
should make no changes for uncertain reasons, but if it is 
clearly proved that my ownership is an injury to society I 
ought to renounce my title and society ought to annul it. 
This is no place to discuss at length so great a question, 
but we may mention some considerations of importance. 
First, there can be no doubt that at present the ownership 
of property is the greatest incentive offered to private en- 
terprise. It is by no means the only incentive, nor need it 
perhaps always be the greatest, but that it now is the great- 
est can hardly be doubted. The greatest thing in human 
life is its incentives, and while some incentives may, and 
naturally do, diminish in importance as new ones develop, to 
destroy a powerful incentive is a certain disaster. This 
single consideration, to which many others might be added, 
is in itself sufficient to justify the institution of private prop- 
erty. 

But, inasmuch as private property has always been and 
must of necessity be limited, the question assumes another 
form : Iloto much private ownership should be retained ? 
We may lay it down as a general principle, making at pres- 
ent no application of it to details, that as private property 



Fundamentals — Right of Private Property. 263 

is a social institution it finds its limitations in the wel- 
fare of society. As soon as any of its forms or extensions 
become anti-social these should be suppressed. Private 
property is in general specially beneficial as tending to in- 
creased production, although some forms of it decrease pro- 
duction, owing to large waste involved. The disadvantage 
of private property appears particularly in distribution, 
although here its effects are partially beneficial. We must 
never forget that abundance of goods does not necessarily 
make a people prosperous. If they are so distributed that 
great goods are devoted to the satisfaction of little wants, 
and little goods to great wants, then certain individuals 
may be prosperous; but the majority of men will be miser- 
able in the midst of abundance. That private ownership in 
some cases tends to this result can hardly be doubted, and in 
such cases no justification for it seems possible. 

Influence of Private Property on Individual "Wealth. 
— As private property lies at the basis of the existing eco- 
nomic order it is the institution which, above everything else, 
determines what share of the total income of society each one 
shall enjoy, and every modification of the institution changes 
the distribution of wealth. Private property in railways ex- 
plains a large proportion of the mammoth fortunes in the 
United States. Whether public ownership of railways would 
have been desirable or not, it is certain that it would have 
brought Avith it no such inequalities as private ownership. 
Even a change in the laws governing the transmission of 
property from the dead to the living in France brought with 
it a modification in distribution decreasing the number of 
those owning vast fortunes, and adding to the number of 
those enjoying a competence. Private property must be then 
remembered as the greatest force in the distribution of 
wealth. 



264 Outlines of Economics. 



SUMMARY. 

1. Private property is the most important condition of private industry 
furnished by the State. 

2. Like all other human institutions, it is subject to examination and 
change. 

3. Human welfare is the only possible basis of human rights. 

4. Private property originated in conquest and force, a fact which neither 
justifies nor condemns it. 

5. Tlie right of ownership was formerly less extensive and less absolute 
than now. 

6. The State has increased the guarantees of private property as between 
man and man while asserting more extensively its own riglits of taxation, 
requisition, and eminent domain. \ 

v. The latter right is now frequehOy exercised in behalf of private inter- 
ests. 

8. Extension of private ownership tends to stimulate production and to 
concentrate wealth in large fortunes. 

QUESTIONS. 

1. Why is private property often held to be a natural right not open to 
discussion? What is a "natural right? " 

2. What is the basis of human rights ? Are they subject to examination ? 

3. What is the origin of private property? Does this justify it? Why? 

4. What change has taken place in the extent of the property right ? In 
its absoluteness ? 

5. Has the State increased or decreased its guarantees of private owner- 
ship as regiirds other private parties? As regards its own claim? Why? 
Wliat farther extension of State limitations in recent times? 

6. Should private property be retained ? If so, how far ? Why ? 

7. What is the effect of private property on production? On distribution ? 
How far is the effect in either case beneficial? Why? 

LITERATURE. 

The subject of private property in its economic and social aspects is 
one which has been singularly neglected by English and American writers. 
John Stuart Mill treats it briefly in his Political Economy^ Book II, 
Chapters I and II. The most satisfactory treatment found in economic 
literature is that given by Professor Adolph Wagner in his Grundlegung 
der Folitischen Oekonomie. By far the best treatment of private property 
from the legal standpoint with wliich the present writer is acquainted is 
given by tlie distinguished German jurist, the late Professor Rudolph von 
Ihering, in the first volume of his Zweck im Recht. No one who would be 
well informed on this subject should neglect to read his masterly exposition. 



CHAPTER HI. 

FUNDAMENTALS— GUARANTEED PRIYILEGES. 

Trade-marks, Copyrights, and Patents. — Closely 
connected with the general subject of ]Droperty is a legal 
arrangement whereby exclusive privileges are awarded in 
return for services to society. These privileges become a 
special form of private property, and have particular signifi- 
cance in the distribution of wealth, although they are not 
without importance in the production of wealth on account 
of the stimulus which they give to improvement. 

Trade-marks come under this head. They give property 
in a design which characterizes the product of a single 
undertaking, as an individual manufacturer, a firm, or a com- 
pany. It is altogether desirable that those who, by the 
superiority of their wares, establish a reputation should be 
protected from that contemptible class who, without energy 
or initiative of their own, attempt to steal the fruits of the 
exertions of others. It encourages a producer to establish a 
reputation to know that he can distinguish his goods by a 
design which others may not imitate. 

Copyrights and Patents. — Government creates exclusive 
privileges by copyright and patent laws; but this is done 
professedly in the interest of the general public, and not of 
any favored class. Authors and inventors are granted ex- 
clusive rights in their productions for a limited period. 
This monopoly is considered a fit reward for valuable public 
services. Copyrights and patents have been objected to as 
interferences with natural liberty, but they appear to have 
justified themselves in the stimulus which they have given 
to authorship and invention. It must, however, be remem- 
bered that all intellectual effort is an historical product. 



26Q Outlines of E 



CONOMICS. 



The telephone, for example, did not spring from the mind of 
one man, as Minerva from the head of Jupiter. The tele- 
phone was preceded by a century of scientific invention 
and discovery, most of it poorly enough remunerated. The 
telegraph was, similarly, the result of generations of careful, 
plodding industry of scores of men. Professor Henry, of 
Princeton College, whose services in connection with the 
completion of the telegraph were most distinguished, con- 
scientiously refused to take out any patent. It also happens 
that several persons almost simultaneously and independ- 
ently make the same discoveries and inventions. Now, if 
the man who makes the finishing touches which lead to utili- 
zation of a long line of work alone is rewarded, it is like 
paying only the workman who put the roof on the house. 
It is not generally understood how serious an interference 
with liberty patents are. A man who has a patent is al- 
lowed to say to all the rest of the world, " Because I have 
first done such and such things you must not do them." 
Yet there may be those who about the same time, without 
any knowledge of him, had found out how to do them. 
When a principle existing in nature is allowed "to be 
patented, and not merely the application of the principle, 
the interference with liberty becomes still stronger. The 
practical conclusion is somewhat like this : Patents, like 
copyrights, are beneficial. Experience seems to warrant 
this assertion. Patents do not, however, rest on so strong a 
basis as copyrights, because no two persons could ever write 
precisely the same book, and the fact that I have written a 
book in no wise keeps you from writing any book you 
please. Yet even intellectual effort is largely a social product. 
No great author gives the world what was merely evolved 
out of himself. On the contrary, such a one lets an age 
speak through him. The principle which should govern 
copyrights is a clear one. It is to give an author reward 
for his services, not to give persons a reward for services 
which others have performed. As has been well said, were 
not copyrights limited we might now have a " Duke of 



Fundamentals — Guaranteed Privileges. 267 

Shakespeare," deriving a large income from the services of 
a man who lived three hundred years ago. 

Patents should not be granted on light and trivial 
grounds, and the period for which they are granted ought 
to be strictly limited, and subterfuges for the evasion of 
this limitation ought not to be suffered to succeed as at 
present. Moreover, owners of patents ought to receive their 
patents on conditions which will compel them to use them 
or allow them to lapse ; also, to grant to others the right to 
use the patent on payment of a reasonable royalty. It has 
also been found beneficial in some countries to lay an annual 
and perhaps slightly progressive tax on patents, so that 
those which are not important or not used may not interfere 
with industrial progress, for it is a condition that non-pay- 
ment of the tax works forfeiture of the patent. Laws ought 
also to be changed so as to prevent such an abuse of patents 
as we have frequently witnessed in our rural districts, where 
farmers have been induced to infringe patents unwittingly 
in order that damages might be collected from them. The 
suggestion of a former commissioner of patents, that the 
right of purchase of a patent be reserved by the United 
States, is to be commended. Our patents at the present time 
promote monopoly, and in some cases interfere senselessly, 
it is to be feared, with manufactures. The patent laws re- 
quire to be simplified and amended and their abuses removed. 
At the same time reward should in some way always be pro- 
vided for those who make valuable inventions. 

The Right of Contract. — Scarcely second to the right 
of private property is the right of contract for the mainte- 
nance and value of which we are equally dependent upon 
the State. Some sort of contract lies at the basis of all asso- 
ciated activity. To secure the conditions of such activity two 
things are necessary: First, that men should be allowed to 
bind themselves; and, second, that they should be compelled 
to respect the agreement thus entered into. Both these are 
secured by the activity of the State. That such a condition 
of associated activity among men should be maintained can 



268 Outlines of Economics. 

hardly be doubted, but it too has its limitations, limitations 
resting here, as everywhere, upon human well-being. Limi- 
tations upon this right have been known in varying degrees 
and different forms from the earliest times. Legislation 
prescribes under what forms and conditions contracts shall 
be valid, and declares that under certain circumstances con- 
tracts shall be null and void. Experience has shown the 
necessity of this. Children, for example, cannot make valid 
contracts, for they are not presumed to have the requisite 
knowledge and judgment to protect themselves. Contracts 
which are clearly opposed to public policy are invalid. A con- 
tract whereby a person should sell himself into slavery would 
not be binding, yet the rule is the validity of contracts. 

The Bight to the Establishment of Private Enter- 
prises is closely allied to the foregoing. This right to man- 
ufacture or sell what and when one pleases is a compara- 
tively recent one. It has usually been greatly limited by 
despotic governments, and the right has been made a matter 
of sale for the purpose of raising revenue. Most such limi- 
tations have been of the nature of abuses, and our own time 
has seen the abolition of an immense number of hamper- 
ing and vexatious restrictions designed for the plunder rather 
than for the promotion of private enterprise. Restrictions 
still exist, however, especially on the liquor traffic, which is 
subject to severe limitations. In this case there is of course 
a special reason for it. There is room for question whether 
entire freedom in the establishment of private enterprises is 
wholly profitable even in other cases. The tendency is often 
to multiply the number of competing concerns far beyond the 
point of greatest efficiency, and so to maintain a numerous 
body of poorly paid toilers and an expensive service for society. 

Personal Liberty, including the right of movement 
and acquisition, is a right slowly acquired by society. It is 
not and never was and never can be an unlimited right. So 
long as men touch each other in society they must limit each 
other, or the liberty of one becomes the slavery of another. 
It is the endeavor of the State to equalize human liberty, not 



Fundamentals — G^uaranteed Privileges. 269 

to make it absolute, for this is impossible. The question is 
not whether we shall limit liberty, but how we can so limit 
it in each as to secure a maximum of liberty to all. Here 
most of all we hear men talk of " natural rights." When 
it is proposed to abolish the sale of intoxicating liquors it is 
urged that men have a right to drink what they please. 
When a man becomes a pauper through drink he claims 
that he has a natural right to live and that society owes him 
a living. If he leaves a helpless family at death the same 
claim is made for them. Strange that men so seldom think 
that society has "natural rights" of self -protection against 
those w^ho prey upon it. Liberty is indeed a great good, but 
we must freely submit to restrictions upon our liberty — even 
for the sake of liberty. 

For the maintenance of these fundamental conditions of 
private enterprise, namely, private property, liberty of con- 
tract, liberty in the establishment of enterprises, and liberty 
of person, we are dependent upon the State. No other in- 
strument of society is adequate to this task. Self-help in 
these matters, in a narrow sense of self-help, opposing self- 
help to government activity, is not only insufficient for most 
of us, but wlien exercised by the powerful, who prefer it, is 
pernicious. There is a tendency of vast corporations in the 
United States to use self-help in protection of property, sup- 
porting armed forces to this end. This sort of self-help is 
the beginning of anarchy, and tends to bring us back to a 
condition of semi-civilization. Fortunately, legislation is re- 
stricting the right of self-help in these cases. This is a point 
on which there is virtually no disagreement. The mainte- 
nance of these fundamentals, if they are to be maintained at 
all, can be accomplished in no other way. When the State 
attempts this and little more its policy is said to be passive. 
Without its activity production, in its present form, would 
be utterly impossible. And yet when its sphere is so re- 
stricted we cannot say that the State participates actively in 
production, as this word is generally used. This passive 
policy is also called the laissezfaire, or let-alone policy. 



270 Outlines of Economics. 



SUMMARY. 

1. Trade-marks, copyrights, and patents are privileges guaranteed to in- 
ventors, autliors, and reliable manufacturers to reward and stimulate their 
efforts. 

2. All such efforts are largely social, however, and rights conferred should 
be compatible with social interests. 

3. Patents should be more stringently limited than now on account of 
their exclusive and largely fortuitous character. 

4. The right of contract is a condition of private enterprise furnished by 
the State. Like the riglit of property, it should be preserved and limited. 

5. The right to establish private enterprises, formerly much limited, is 
now approximately free; it may require some limitation. 

6. Personal liberty, including freedom of movement, is a right slowly ac- 
quired and subject to some inherent limitations. 

QUESTIONS. 

1. What is a trade-mark? A copyright? A patent ? Which is most 
clearly justifiable ? 

2. What dangers attend the issue of patents? Do they apply to copy- 
rights as well ? Why ? 

3. What element of injustice is involved in these privileges? 

4. What two elements are involved in the right of contract ? Under wliat 
conditions is this right safe ? 

5. "What dangers attend freedom in the establishment of private enter- 
prises? 

6. What natural limitations are there to the right of personal liberty? 

LITERATURE. 

Annual Eeports of the United States Commissioners of Patents, espe- 
cially the Reports for 1888. 



CHAPTER IV. 

STATE PARTICIPATION IN INDUSTRY. 

We have seen that the State's first service to economic 
activity is the maintenance of certain fnndamental condi- 
tions which are the necessary conditions of that activity. 
We have now to consider another set of conditions furnished 
by the State, conditions less fundamental and more nearly 
allied to the private factors of production, but of such a 
nature that only the State can furnish them efficiently. 

Industrial Facilities.— Under this head may be placed 
roads, river and harbor improvements, lighthouses, and other 
public works whose purpose is primarily to facilitate industry. 
These are closely allied to capital invested in private plants, 
but they are works of such general utility, and their service 
to individual industries is so indefinite and difficult of calcu- 
lation, that only the State can or will undertake them. To a 
limited extent roads may be built by private individuals and 
the cost be defrayed by charging toll, but this never pro- 
duces a satisfactory and adequate road system. To a still 
more limited extent private contributions may aid the con- 
struction of works of general utility; but the experience of 
all nations has shown that undertakings which require great 
outlay, and promise only vague and remote returns difficult 
of collection, will not usually attract private enterprise, and 
the service, when rendered by private enterprise, is not satis- 
factory if we view its results from a broad social stand- 
point. 

The only questions, therefore, are as to which department 
of government should be intrusted with this economic func- 
tion and how much should be done. On both these ques- 
tions there has been much debate and much unsatisfactory 



272 Outlines of Economics. 

experimentation. In the case of roads the policy has pre- 
vailed of leaving their construction and maintenance to the 
city, village, or township. This policy, combined in the rural 
districts with an antiquated and vicious system of taxation, 
has resulted in a system of roads which are a national dis- 
grace. This extreme localization of responsibility has fos- 
tered narrow views and niggardliness which has brought as 
a result impeded and impoverished rural industry. This 
mistaken policy is largely due to a reaction against unwise 
outlays made at an early date in many States at a time when 
resources were meager. The result was burdensome debts 
which some of the States repudiated, and in some States 
clauses were inserted in the constitution prohibiting expendi- 
ture by the State for roads and similar improvements. This 
explains the policy but does not justify it, and it is encour- 
aging to note that an agitation in favor of road improve- 
ment has begun which promises substantial results. The 
mistake seems to have been in defining local interests. Be- 
cause a mile of road is in a township it does not follow that 
it is a township interest. It may and often does form a part 
of a far-reaching and important system, and represents inter- 
ests which the town will quite fail to appreciate. A post 
office is local in situation; but suppose townships were left to 
operate their own post offices; would they do it adequately, 
and if not, would none but local interests suffer ? In sharp con- 
trast to our road system stand our river and harbor improve- 
ments, in connection with which the policy of national main- 
tenance has prevailed. Whatever may be said of jobbery and 
mismanagement in connection with these improvements, 
their record has been economy and efficiency itself compared 
with the wasteful and shiftless management of our roads. 

Bounties, Subsidies, and Franchises. — Under this 
head are included a great number of tangible encourage- 
ments, not to private enterprises in general, but to particu- 
lar enterprises. They differ from industrial facilities, which 
we have just discussed, in that they are not public works 
opened to private use, but transfers of goods to particular 



State Participation in Industry. 273 

individuals or private corporations to encourage their under- 
taking. 

Bounties are sums of money offered as inducements to 
private parties. During the late war they were offered to 
induce men to enlist in the army. As their use in such cases 
is exceptional and due to emergencies which do not ordina- 
rily arise and do not directly concern industry, we may omit 
this part from our discussion. Bounties are, however, paid 
by many governments for producing certain goods, which for 
various reasons it is deemed wise to encourage. The ex- 
ample familiar to us is that of the sugar bounty of two 
cents per pound on sugar raised within the United States. 
Canada offers bounties on iron ore mined, etc. 

Subsidies are closely allied in principle to bounties. They 
are payments to those undertaking enterprises of importance 
to the public but too extensive to be directly remunerative. 
They are usually in the form of annual payments of a fixed 
sum. Money subsidies are common. Such are the subsidies 
to steamship companies which have been voted at one time 
and another by nearly all powerful nations.* Subsidies 
have been granted to many other objects. In some of the 
countries of Europe theaters and operas received annual 
subsidies. 

Land Grants. — Subsidies are not always in money. A 
frequent form of subsidy to railways and canals in this coun- 
try is known as the land grant. Railways built through 
unsettled territory have often received grants from govern- 
ment of alternate sections of the government land for a dis- 

* Steamship subsidies have several times been granted by our federal 
government. A subsid}^ of $350,000 per annum was granted to a line run- 
ning to Germany in 184'7, and others soon after, and in 1852 our government 
paid $1,946,686 in subsidies to encourage the development of an American 
merchant marine. The system was discontinued in 1858, but resumed in 
1865. It developed extensive scandals, and was aboHshed again in 1815. 
The policy has seemingly been resumed by the last Congress in the mail 
contract granted to the "American Line" of steamships by the conditions 
of which the Paris and the New York were registered as American 



274: Outlines of Economics. 

tance of some miles on each side of the railway. These grants, 
which might perhaps better be classed as bounties than as 
subsidies, have been the subject of much dispute and the oc- 
casion of great abuses. Railways which have failed to com- 
ply with the conditions of their grants have not unfrequently 
managed to keep possession of them in defiance of obvious 
justice. 

Loans of publiG credit are another kind of subsidy. They 
are in principle a guarantee of private indebtedness by 
government. The most prominent example of this in our 
history is the so-called Credit Mobilier Company, organized 
for the building of the Union Pacific Railway. The federal 
government, in addition to an imperial land grant aggregat- 
ing over thirty million acres for the Union and Central Pa- 
cific Railways, guaranteed the indebtedness of the company 
for 125,000 per mile of road in addition. This remarkable 
subsidy, almost sufiicient to build the road, was secured by 
extensive bribery in which many members of Congress were 
implicated. This has been pronounced by a recent writer 
to be " probably the most extensive legislative scandal ever 
known in the United States." The uselessness of the assist- 
ance is seen in the fact that the money was virtually " ab- 
sorbed " by the construction company which had corrupted 
Congress to secure it, and added practically nothing to the 
value of the road. 

Franchises may for our purposes be distinguished into two 
classes, namely, franchises in a broader and franchises in a 
narrower sense. Franchises in the broader sense are special 
rights and privileges conferred by a legislative body which 
could not be exercised otherwise. The power granted to a 
number of men to act as a corporation is itself a franchise, and 
the various attributes of the corporation are its franchises. 

Franchises in a narrower sense are grants of the use of 
public property for private enterprises. Such is the right 
granted a street railway or gas company to lay its tracks or 
its mains in the streets. A franchise may be granted for a 
term of years or forever ; it may be granted free or sold for 



State Participation in Industry. 275 

a specified amount or for a percentage of receipts ; it may be 
granted unconditionally or conditionally. But however it 
be granted it maintains one character at the bottom; it is 
a bargain between private parties and public officials for val- 
uable public property. In general the interests are great, 
the officials few, and the private parties wealthy. If corrup- 
tion is possible these are the conditions to produce it. It 
will not surprise us, therefore, to find that after the Credit 
Mobilier, perhaps the next greatest scandal in the United 
States of recent years is connected with the granting of 
franchises. In 1884 thirteen out of twenty-four aldermen in 
New York formed an organization for the purpose of selling 
franchises and agreed to vote together on all "business 
transactions." They held frequent meetings, at which they 
debated offers from private corporations. The Broadway 
Surface Company offered them $500,000 for a street-car 
franchise, which was granted free. Being vetoed by the 
mayor, it became necessary to enlarge their " organization," 
and before it was finally passed over the mayor's veto 
twenty-two aldermen were implicated. The fraud was for- 
tunately discovered and some of its perpetrators punished, 
but none. of the immense value of the property thus lost to 
the city was recovered. 

It is useless to reproach those men. Culpable as they 
certainly are, they are in no small degree the victims of a 
system which corrupts private parties as surely and effectu- 
ally as it does the State, and for which society as a whole 
is responsible. It is surely desirable that good men be 
chosen to office, but as surely as carrion attracts vultures, 
rather than doves, so surely wdll a system which holds out 
special possibilities to rascality attract men who will profit 
by these opportunities. It is doubtful if a government ever 
existed in a developed country which could safely trust 
itself with the management of the vast private interests 
which our civilization has developed. Certain it is, no so- 
ciety ever before asked of its officials such impossible vir- 
tues, or obtained them if it did. 



276 Outlines of Economics. 

We have said already in speaking of the functions of the 
State that it is ill adapted to enterprises of a special nature, 
that is, enterprises which profit a part of its citizens rather 
than the whole. We might expect, then, that the history of 
State aid to the special industries would not be wholly flat- 
tering, and we shall not be disappointed in this expectation. 
Much is said about corruption 'u\2yMic undertakings. There 
is relatively little such corruption, as we shall see later. 
Corruption occurs in mixed undertakings, in which part of 
the transactions are secret and irresponsible arid bribery is 
made both lucrative and safe. While an occasional public 
enterprise, like the building of the Capitol at Albany, has 
been characterized by extravagance and inefficiency, and 
perhaps gross frauds, such cases are the exception. On the 
other hand, the history of government aid to private corpo- 
rations has scarcely a clean page. The reason is not far to 
seek. A public transaction is wholly public. Every step 
in it is open, not only to the inspection of officials, but often 
to that of private individuals as well. Even when officials 
are lenient and the public negligent the opportunities of 
embezzlement are comparatively few. There is always a 
chance, and generally a likelihood, of detection. A private 
corporation, on the other hand, is private. It can conceal 
profits, falsify accounts, water stock, and in a thousatid ways 
conceal the nature of its transactions. If it spends money 
to buy up a legislature the public frequently does not find it 
out. This power is bad enough when there is no question 
of government aid, but when private interests are enlisted 
to secure subsidies, land grants, franchises, etc., their power 
is a menace to the very existence of liberty. 

Another difference between public and mixed enterprises 
is that the former are much more readily changed. When the 
State decides upon a public undertaking, it does so by statute, 
which can be amended or repealed as need requires. But 
corporations are organized under charter, and, however in- 
jurious to society, these charters, having been declared con- 
tracts by our courts, are made inviolable by our federal con- 



State Participation in Industry. 277 

stitution. Mistakes thus made by the government in these 
mixed undertakings cannot be remedied, as in the case of 
strictly public enterprises. This branch of our history is 
full of instances of exaggerated privileges conferred on 
private corporations for long terms or in perpetuity, and 
which simply had to be endured. 

It is hardly too much to say that the principle of State aid 
to special enterprises is the most vicious and uncontrollable 
of all forms of State activity. While it may be and doubt- 
less is justifiable in certain cases, all experience points to a 
reduction rather than an increase of the number of mixed 
enterprises. It is no implication that legislators are worse 
than other men, to say that their integrity should not be ex- 
posed to the extreme test which it has so often and so sig- 
nally failed to bear. Where in the annals of contemporary 
public enterprise can we find a parallel to the Credit Mobi- 
lier in America, or the- Panama Canal scandal in France ? 
The corruption of government is a sad fact, but it is largely 
a corruption hy private interests. This leads us to the 
second objection. There is no necessity for it. Private en- 
terprises which, because of their magnitude or because they 
are undertaken for the general interest, cannot succeed with- 
out public aid are unfit for private management. 
19 



278 Outlines of Economics. 



SUMMAKY. 

1. State participation in industry in its simplest form consists in the fur- 
nishing of free industrial facilities, roads, harbors, etc. 

2. The public roads in the United States have been generally left to units 
more local than the interests involved, and have been neglected in conse- 
quence. 

3. River and harbor improvements have been committed to the central 
government with better, though not ideal, results. 

4. Bounties and subsidies are payments of money to encourage private 
enterprises. 

5. Land grants are a form of subsidy to railways and canals. 

6. Loans of public credit are public guarantees of private indebtedness. 

I. Franchises are grants of privilege, or, more narrowly, grants of public 
property for temporary or permanent use by private parties. 

8. All these forms of public aid to individual enterprises have been more 
or less productive of corruption wherever adopted. 

9. Mixed enterprises are less responsible to the public than public enter- 
prises. 

10. Mismanagement of mixed enterprises is more difficult of correction 
than of public enterprise, being protected by charter rights. 

II. Private enterprises requiring extensive public control are safer in the 
hands of the State. 

QUESTIONS. 

1. Why should the State build roads ? If left to private enterprise what 
would be the result ? 

2. What is the advantage of the county or State over the township in 
road building, and vice versa ? 

3. What policy has prevailed in the United States in road building? in 
harbor improvement ? What are present tendencies ? 

4. What is a bounty? a subsidy? a land grant? a loan of public 
credit? a franchise? What is the danger of each? Why? 

5. What are the objections to State participation in individual private 
enterprises? What other policy is possible? 

LITERATURE. 

Hudson, J. F. : The RaUiuays and the Eej.uhUc. 



CHAPTER V. 

STATE REGULATION OF INDUSTRY BY TAXATION. 

We have to do, not with taxation as a means of raising 
revenue, the consideration of which comes later, but with 
taxation as a measure of repression or encouragement. Such 
taxation is of two kinds, taxation on domestic products and 
taxation on imports. 

Tax on Domestic Products. — When duties are laid on 
a great variety of manufactured domestic products, most of 
them are purely revenue duties. Such was the case during our 
last war with our " internal revenue," and often in the history 
of many European countries. Such duties are also frequently 
called excise duties. No government lays duties in general 
for the purpose of restricting or repressing the development 
of its own industries. To this rule, however, England and 
America have made a few undoubted exceptions. The to- 
bacco and liquor industries need limitation of the most 
stringent character, as many people believe, and this senti- 
ment expresses itself in these countries by restrictive taxa- 
tion. In England tliis restrictive character of the tax is less 
marked, and the need of revenue would probably keep the 
tax in force even if the theory of restriction were not held ; 
but in the United States this purpose of the tax is so strongly 
marked that at a time when our revenues were excessive and 
a means of reducing them was earnestly sought the senti- 
ment in favor of those taxes was strong enough to prevent 
their repeal. 

The history of our internal repressive taxation has at least 
two lessons. In the first place, the tax must not be too high. 
Beyond a certain point it fails to repress and results in 
evasion and corruption of officials. During the period when 



280 Outlines of Economics. 

whisky was overtaxed in our countiy it was constantly sold 
in our markets at less than the amount of the tax. What 
clearer proof could there be that the law was evaded ? 
Another tendency was developed at the same time, perhaps 
even more pernicious, namely, the adulteration of liquors 
with poisonous ingredients. The fearful character of the 
intoxicating liquors sold here at and since that time is in large 
part due to habits fostered by injudicious efforts at repress- 
ive taxation. 

The second lesson is that repressive taxation on industries 
of this character exercises but a feeble influence in the direc- 
tion of repression. Probably the most eflicient service such 
a tax renders is to shift consumption from a heavily taxed 
and supposedly more injurious liquor to a more lightly taxed 
and presumably more innocent one. This result has some- 
times followed in a marked degree, but beyond this a princi- 
pal argument for such taxes must be the revenue they produce. 

Protective Dnties. — These are duties levied on imports 
with a view to increase the price of goods brought from 
abroad and so " protect " the home producer against foreign 
competitors, and thus regulate commerce in his favor. This 
regulation is called protectionism^ and it will at once be rec- 
ognized as a vast subject which could easily be made to 
fill several volumes like the present. It will here be possible 
merely to mention the main points in the controversy be- 
tween those who believe in this kind of regulation — protec- 
tionists — and those who do not — free traders. 

Arguments of Protectionists.— It is argued in favor of 
protectionism that it promotes nationalism, and this is held 
to be a good thing. It is urged that domestic trade draws 
the citizens of a country together, while international trade is 
cosmopolitan and tends to their separation. Protectionists 
maintain further that protective tariffs are necessary in order 
to build up a diversified national industrial life. They claim 
that there exist in a new country like the United States 
many natural industrial advantages of which the inhabitants 
cannot avail themselves unless they are at least temporarily 



State Begitlation of Industry by Taxation. 281 

protected. Government should, they saj, foster infant in- 
dustries, in order to develop our natural resources and to 
produce diversity in industrial pursuits. The diversified- 
national-industry argument and the protection-to-infant-indus- 
tries argument are thus supplementary. It is held that older 
nations, with their superior capital and acquired skill, will 
break dow^n new pursuits in their infancy in order thereaffer 
to have the market to themselves. Closely connected with 
this is an argument based on military grounds. It is often 
thought by protectionists that industrial national independ- 
ence prepares a nation better for international war. The 
home-market argument for protection naturally follows. A 
home market is claimed to be superior because it is alleged 
to be a surer market. Producers are less likely to be de- 
prived of it by war and other emergencies. It is, moreover, 
urged that it is beneficial especially to the farmer, because 
it saves the expenses of ti-ansportation of products to foreign 
lands. It has also been maintained by the distinguished 
American economist, Mr. Henry C. Carey, that a country 
can remain permanently prosperous only on condition that 
what is taken from the soil should be returned in manure 
and other kinds of fertilizers, and that this will be accom- 
plished only when products are consumed at home. 

Finally, protection has been advocated in the United States, 
especially since about 1840, when the labor movement began 
to assume prominence, on the ground that it has been the 
cause of higher wages in the United States than in European 
countries, and that it is necessary to maintain these high 
wages, which are said to be one main cause of our higher 
civilization. 

ArgTiments of Free Traders. — It is frequently alleged 
that protective tariffs are a violation of an assumed natural 
right of every man to buy his goods where he will and to 
sell his products wherever he sees fit, untrammeled by hu- 
man laws. The question of natural right has been sufiiciently 
considered elsewhere. It is much to be desired that argu- 
ments of this sort should cease to be heard so frequently. 



282 Outlines of Economics. 

It has been claimed that the prote;3tive tariffs in the United 
States are unconstitutional. It would be most unfortunate 
and anomalous if nowhere in our country were lodged the 
power to pass such regulations regarding international com- 
merce as might appear to be required for the promotion of 
the public welfare. But this argument is idle. It does not 
correspond to the opinion of our best jurists, and it is very 
certain that we shall never see a supreme court in the United 
States which will venture to pronounce protectionism uncon- 
stitutional. Protectionism has been called socialism, but this 
epithet of malignity is so generally applied to whatever a 
person incompetent to argue a cause does not like that it 
will scarcely terrify any one. 

The really able arguments of free traders are those which 
aim to show that protectionism on the one hand fails to ac- 
complish its ends, or is needless for the accomplishment of 
the ends it contemplates ; on the other hand, actually does 
accomplish positive harm. It is denied that protectionism 
is necessary to foster nationalism, and modern experience 
presents strong testimony to support this denial. During the 
past fifty years international commerce has expanded mar- 
velously, and international communication has been in every 
way facilitated, while at the same time we have witnessed a re- 
markable growth of national feeling all over the civilized world. 

It is not clear that protective tariffs are necessary to pro- 
duce a diversity of pursuits in a great country like the United 
States. It is admitted that a purely agricultural nation is 
not likely to progress rapidly ; but it would seem that our 
enormous extent of country, our varied climate, our natural 
gifts of all sorts, had in themselves amply provided for suffi- 
cient diversity, and it can scarcely be maintained that one or 
two pursuits, more or fewer, can be of importance. A vast 
number of pursuits means widely extended division of labor, 
and this is by no means an unqualified blessing. 

The argument for protection on the ground that it is a 
benefit to the wage-earner does not seem to the writer con- 
clusive. When this argument is analyzed and answered in 



State Regulation of Industry by Taxation. 283 

detail it is seen to involve a discussion of many complex 
economic problems. One consideration only will be suggested 
in this place. Labor comes in competition with labor, not 
directly with commodities. Labor desires commodities, and 
tlie more commodities it receives the better. Now, if it is 
desired to protect labor, a tax ought to be put on imported 
labor, and labor ought thus to be rendered scarce. If this 
were done, then those who desire labor would be obliged to 
pay heavily for it, as actually happened in England after 
the "Black Death" in the fourteenth century had killed oiF a 
large part of the laboring population. If it is desired to 
benefit labor it would seem to the author that after importa- 
tion of labor has been taxed, and labor thus rendered scarce 
and dear, the importation of such commodities as are con- 
sumed by wage-earners primarily should be encouraged in 
order that labor might secure an abundance of them cheaj^ly. 

It is maintained by free traders that protectionism is espe- 
cially injurious because it diverts industry from a more to a 
less productive channel. It is held that industrial forces, if 
let alone, will seek those fields which yield largest returns, 
and that if government artificially induces them to take an- 
other direction the factors of production become less fruitful 
and the national economy suffers. 

It is, moreover, alleged that protectionism fosters monop- 
olies because it shuts off international competition. Recent 
combinations of domestic producers, as seen in trusts, which 
control so large a ]3ortion of the industrial field, would seem 
to support this allegation. It is certainly taken for granted 
that if foreign competition is shut off or lessened home pro- 
ducers will still compete. That has been one of the funda- 
mental arguments of protectionists, but now we find home 
producers combining to put an end to home competition. It 
is scarcely too much to call this an abuse of the principle of 
protection. 

Some General Considerations ought to be kept in 
mind in tariff discussions. First, its importance is exagger- 
ated. "We find a country like England prosperous under 



^84 Outlines of EconomiOB. 

free trade; we find countries like France and the tJnited 
States prosperous under protection. It is of real but not of 
vital importance. Domestic trade exceeds in its aggregate 
amount in the United States almost immeasurably foreign 
trade. The domestic trade of the Mississippi valley alone 
is far greater than our entire foreign commerce. It is much 
to be desired that other economic questions should be more 
discussed. 

Second, statistics about a country's prosperity, urged either 
for or against protection, are, as usually presented, of no 
value. The tariff policy of modern countries has been a 
minor factor in their industrial life. Inventions and discov- 
eries, especially the application of steam to industry, and the 
growth of intelligence, have been the chief forces which 
have made such astounding additions to the wealth of the 
world during the nineteenth century. 

Third, bad as it may be in many resj^ects, the American 
tariff is an historical growth, and during the century of our 
national existence it has taken deep root. It has become 
part of our life, and it cannot be suddenly eradicated with 
impunity. If it is true tliat American labor would be better 
off without it, it does not follow that it ought to be removed 
suddenly in the interests of American labor. If an indus- 
trial growth is abnormal it is none the less true that adjust- 
ment to normal conditions is a painful process and should be 
conducted cautiously. Displacements of labor and capital 
cause suffering and loss. At the same time, it is impossible 
to tolerate permanently a bad condition of things, and while 
rashness is to be deprecated progress should be insisted on. 

Our capital has become enormous. Skill has been devel- 
oped in our country, and it is not clear that our industrial 
leaders are not quite capable of holding their own with the 
world in a free market. The fact that labor receives a large 
share of the product, if such is the case, does not render 
labor and the other factors of production less fruitful. Does 
the American farmer abandon the cultivation of land be- 
cause out of a hundred bushels of wheat grown he must 



State Kegulation of Industry by Taxation. 285 

give the American laborer, say, fifty, while his European 
rival gives only thirty bushels out of a hundred ? He still 
has fifty bushels left. 

This is only a small part of the subject of protectionism 
and free trade, a very small part, but it is trusted that it will 
prove suggestive, and that no one will terminate with this 
his tariff studies. 

It may be said in conclusion tliat reform of the tariff is 
possible both from a protectionist and from a free trade 
standpoint. One thing desired is simplicity in our tariff" 
system, which is now complex. No article should be taxed 
unless there is some good reason for it. Other things being 
equal, the fewer articles taxed the better. Reductions in 
duties wherever practicable should be made. S>pecific duties, 
that is, duties which are calculated by weight, measurement, 
or count, as simple and less provocative of temptation, are 
from the standpoint of honest administration preferable to 
ad valorem duties, that is, duties which are a percentage on 
value, a thhig so hard to be determined. 

The main disadvantages of specific duties are two, namely : 
In the first place, they frequently conceal the real amount of 
the tax. Five cents on an article does not seem a high tax 
when mentioned, but if the price of the article is only five 
cents it is a tax of one hundred per cent, which has a very 
different sound. In the second place, it is not easy in a sys- 
tem of specific duties to tax articles consumed by the rich 
more heavily than those consumed by the poor. A tax on 
cloth of five cents a yard makes no distinction between 
cheap and expensive cloth. Of course, silk goods may be 
taxed more heavily per yard than cotton goods, wine more 
heavily per gallon than beer, and so on indefinitely. But 
this is only an approximation to proportionality. We can 
only say that specific duties are to be preferred when their 
peculiar disadvantages do not more than counterbalance 
their obvious advantasfes. 



286 Outlines of Economics. 



SUMMARY. 

1. Taxes on domestic products are laid usually to raise revenue; rarely, 
as in the case of liquors and tobacco, to restrict consumption. 

2. Such taxes, if too high, produce evasion and adulteration, each more 
objectionable than the normal consumption. 

3. Taxes on imports are for revenue or to " protect " home production. 

4. Protection is defended as encouraging nationalism, diversification of 
industries, and industrial independence, saving transportation, keeping up 
the soil, and maintaining liigh wages. 

5. It is attacked as contrary to natural right, imconstitutional and unnec- 
essary either to develop industries or national sentiment. 

6. A tax on laborers imported vs^ould seem to be a better protection for 
American labor than a tax on goods. 

T. Protection is said to foster monopoly and pervert the natural course of 
industrial development. 

8. Present tendencies to monopoly indicate an abuse of protectionism. 

9. The tariff has been intentionally exaggerated in political discussions. 

10. It is deeply rooted here, and must be corrected or removed slowly. 

11. A reform in the details of our tariff system is needed from the stand- 
point of either protectionism or free trade. 

QUESTIONS. 

1. What two purposes may justify an excise tax ? an import tax? 

2. What difficulties are there in the way of an excise for restricting con- 
sumption ? What results are actually accomplished ? 

3. What is protection ? What arguments favor it ? How far is each valid ? 

4. What arguments are urged for free trade ? How far is each valid ? 

5. What is the. relative importance of the tariff controversy in politics? 

6. What is the value of statistics in tariff arguments? Why? 

7. What objection is there to a sudden change in the tariff system ? 

8. What possible ways are there of protecting labor by taxation ? 

9. What are the advantages of ad valorem duties? Of specific duties? 
The disadvantages of each ? 

LITERATURE. 

List, F. : National System of Political Econormj ; an able protection work. 

Taussig, P. W. : Tariff History of the United States ; the work of a fair- 
minded free trader. 

Patten, S. N". : Premises of Political Economy ; new view of protection. 

Tliompson, R. E. : Protection to Home Industry; a popular presentation. 

Ely, R. T. : Problems of To -Hay. Chapters I-XY. Argument for tariff re- 
form. 



CHAPTER VI. 

STATE REGULATION OF INDUSTRY BY POSITIVE STATUTE. 

We meet here a mass of legislation wliicli it is impossible 
to examine or even to mention in detail in the short space 
available. It is tjie result of one of the most stubbornly con- 
tested battles in all economic history, but a battle now 
decided so far as the principle is concerned. We have 
touched biiefly upon this struggle in Book I in speaking of 
the non-interference theory promulgated so vigorously by 
Adam Smith and his followers. The essence of this was 
that the State should let industry alone ; that beyond pro- 
viding the fundamentals and the most general industrial 
facilities any interference on the part of the State is pro- 
ductive of more harm than good. There was a profound re- 
liance on the regulative power of comj)etition, which is the 
balanced equilibrium of self-interest. The mistake of the 
older economists lay in treating it as though it were the only 
regulative force. The fact is that competition is only one of 
a number of forces which balance each other, and if the 
other forces are removed competition itself soon disap- 
pears. Now, one of the most fundamental and natural 
of these forces is law, the expression of the ethical sense of 
society through the organ of government. It is as natural 
for men to make laws as to try to "buy cheap and sell 
dear." The attempt to regulate industry by competition 
alone was an attempt to travel on one leg. At the first 
jostle it was necessary to call the other leg into service or 
tip over. 

Labor Liegislation. — Legislation in behalf of labor was 
soon found necessary. It became evident that workmen did 
not by any means move about sufficiently to secure the high- 



288 Outlines of Economics. 

est wages, that they did not quit the employer who was 
careless of their lives and safety, above all that they did not 
limit their numbers in a way to prevent a fall of wages. 
The reason is plain wlien we stop to think of it. Wage- 
earners have families and are attached by many ties to the 
places where they live ; they are poor and cannot move to 
distant localities ; they are ignorant and do not know where 
better wages are to be had ; they are improvident and do 
not prepare for the future wisely, especially for a future 
which mostly concerns posterity. In a word, they are inca- 
pable of competition on equal terms. Employers, too, do not 
do as they were expected to do. It is for their interest to 
develop a strong and efficient class of workmen, but they 
sadly neglect their interest in this regard. It cannot be 
claimed that employers as a class have taken any consider- 
able precautions to maintain a high standard of efficiency 
and well-being in workmen, though they would be better off 
as a class if they did so. The reason is that their immediate 
interest is in lowering wages, and they cannot under a sys- 
tem of fierce competition ignore their immediate interest 
while seeking to promote ultimate interests, for those who 
did so would be speedily driven to the wall by those who 
did wot. It is just here that the necessity for law or collect- 
ive social action appears, namely, to enable men to substitute 
large and ultimate interests for immediate and destructive 
ones. It would be unjust to employers to assume that they 
do not care for their employees. The most would be glad to 
deal more liberally with their men, but a few will not, and by 
their competition they compel the rest to do as they do or 
leave the business. This gives us a fundamental principle 
of the utmost importance. Under pure competition the least 
scrupulous competitor tends to impose his morcd standard 
npon the rest. An instance of this is found in the case of 
barbers who on different occasions in large cities and recently 
in national convention have resolved to agitate for a law 
closing barber shops on Sunday. As a class they desire this, 
but a few will keep their shops open, thus compelling the 



State Kegulation of Industry by Statute. 289 

rest to do so or lose their regular customers upon whom 
their business depends. 

Exactly the same need of law appears in connection with 
wage-earners. Without legal regulation we may expect as 
a certain result, first, a lowering of wages through competi- 
tion (or what amounts to much the same, a keeping down of 
wages when general prosperity is increasing) ; second, a sub- 
stitution of women and children for men in easy emploj^ments 
with a lower wage and a farther ultimate reduction in the 
wages of men, so that not infrequently after women and 
children are employed the wages of a whole family are no 
more than the wage of a man before ; third, the destruction 
of home life and home economy and the great extension of 
immorality ; finally a permanent reduction in the standard 
of life. This progression is the chief disaster which can be- 
fall any j^eople. 

1. Laics Restricting the Employment of "Women and Chil- 
dren. We must insist upon a limitation of labor for children 
which will allow a sound physical and mental develoj)ment. 
Not only are most employments injurious to the health of 
children, but they all interfere with education. Even if we 
gained in goods by child labor (which on the whole we do not 
do) we should and must sacrifice this advantage rather than 
wrong the future citizen and jeopardize the republic by neg- 
lecting his education. 

The case of women is equally imperative. As mothers 
they must neglect their children if they work in factories. 
Infant mortality and disease are the certain result. This is 
by no means all. It is a mistake to suppose that we are rich 
simply in proportion to our goods. AYe are rich also in pro- 
portion to the use we make of them. What can we expect in 
homes where parents and children simply come home to 
sleep ? Thrift, neatness, comfort, to sny nothing of affection 
and the thousand elements of value in home life and associ- 
ations, can scarcely exist. This is emphatically a case where 
the wage-earning classes would be richer with fewer goods, 
with time left to attend to the problem of consumption of 



290 Outlines of Economics. 

their income. But goods would not be less. Of course legis- 
lation cannot prohibit female and child labor, but it can and 
should limit it strictly with a view to the facts here con- 
sidered. 

2. Laios Limiting the Hours and Days of Labor. — Nothing 
at first seems more unnatural than to forbid a man's working 
as long as he likes. This would actually be the case, if he 
worked for himself, but " no man liveth unto himself." It is 
a demonstrable fact that if a small minority of workmen in 
a community are willing to work twelve hours per day un- 
der the competitive system the rest will have to do so. They 
probably get no more wages and produce no more goods ; 
they simply live so much less and retard human progress. 
It is the same as with the barbers. Without law it takes 
practical unanimity to carry a point ; icith laio a majority 
can do so. The unanimity is impossible. When a large 
majority of society favors a change, which should rule, it or 
the minority ? We may lay down the following principles 
in confidence : 

First, the working days should be limited, with different 
limits for men, women, and children. Sometimes the limit 
can be established by private combination, and legal limita- 
tion is not required. It has been observed that in the ab- 
sence of well-enforced legislation the working day is apt to 
be longer in those manufacturing establishments in which 
women and children are employed than in those in which 
men are emj^loyed, because the latter can combine more 
effectively. Private combination to effect a reduction of 
working hours has both limitations and disadvantages. It is 
not likely to be effective in an occupation unless a considera- 
ble degree of skill is required in it, because otherwise it is 
not possible to bring about common action among nearly all 
competitors for employment, and, as just stated, a small mi- 
nority can defeat the wishes of a vast majority. It is to be 
remembered that industrial invention and progress have bro- 
ken down the barriers between occupations and made it com- 
paratively easy to learn to do new work in a manufactory. 



State Regulation of Industry by Statute. 291 

Private combination is, therefore, less effective than formerly, 
and this may explain the favor with which legal regulation of 
the length of the working day is received in a country like 
England by the very classes which a few years since rejected 
it. Private combination would, in the light of recent strikes 
in the United States, not seem to be sufficient for employees 
of vast corporations like our American railway companies. 
Private combination has its disadvantages, because it causes 
serious loss in strikes which attend it and because it incon- 
veniences and injures innocent third parties, namely, the gen- 
eral public. When the public interest is so great, as in rail- 
ways, it would seem the only rational course to have public 
regulation of the hours of labor, establishing a normal work- 
ing day, and, with this, public preservation of the peace. 

It is to be noticed finally that in ordinary manufactories 
it often appears to be sufficient to establish a normal work 
day for women, children, and young persons, as when these 
stop in establishments in which their work is essential the en- 
tire working force must also quit work. It is customary in 
England at present to limit the day only for these three 
classes named. 

Second, Sunday labor should be limited to the real needs 
of society. The day is needed for something else than get- 
ting a living. 

Third, employers should be compelled to take due precau- 
tions for the safety and health of employees. 

Fourth, law should be invoked in those cases where a 
minority can thwart the purpose of the majority or other- 
wise seriously injure society. 

Just how long a working day should be we cannot here 
discuss. Ten hours is • doubtless a maximum, and there is 
some reason to believe that an eight-hour day in manufactures 
would prove equally productive and be of immense gain to 
society. Instead of so short a day of labor a shorter week, 
allowing a Saturday half holiday, has some decided advan- 
tages. Tliis system, which is in vogue in England, is at least 
worthy of careful consideration in this country. 



292 Outlines of Economics. 

3. Laws Regulating Labor Contracts. — These have been 
found necessary almost everywhere. Laborers are notori- 
ously unable to make prudent contracts, and the courts are 
frequently given power to set aside such contracts and sub- 
stitute more equitable ones. A law of the most sweeping 
character has often been urged, establishing a minimum rate 
below which wages could not go. There is something to be 
said in favor of such a law, but unfortunately one serious 
objection to it aside from the very great difficulties of 
carrying out its provisions. While laws limiting the hours 
and establishing the conditions of labor all tend to develop 
and uplift the workmen, this simply tends to give hira more 
goods. As we have said, this alone cannot help him. If it 
resulted in wastefulness or simply in increase of numbers, as 
might be the case, such a law would enlarge society without 
benefiting it. It is doubtless better to enact laws affecting 
the wage-earner indirectly, and, by making him more intel- 
ligent and capable, to try to enable him not only to secure 
but to profit by a larger income. 

Laws Regulating Monopolies and Trusts.— The leg- 
islation w^e have been considering has been developed mostly 
in England, and grew out of the inability of employees to com- 
pete with their employers. Different conditions in America 
have shown the inadequacy of competition more especially on 
another side. Competition is as unable to protect the con- 
sumer as the wage-earner. The breakdown of competition has 
in many cases been complete, and society has found itself face 
to face not with rivals who vied with one another in offers of 
cheap service, but with monopolists who exacted what they 
could. Of late law has been freely invoked to protect society 
from tlieir extortion. The justice of such laws can hardly 
be doubted, but their expediency and efficiency is by no 
means so clear. The case is simply the converse of what we 
considered under subsidies. The private interest which will 
use its resources to secure a vote of land or money or other 
advantage will do the same thing to ward off a threatened 
tax or vexatious regulation. Railways furnish a familiar 



State Kkgulation of Industry by Statute. 293 

illustration. In every legislature tliey keep a powerful lobby 
whicb. often dictates all important legislation. Not to men- 
tion other forms of bribery, which, of course, are private, a 
most demoralizing species familiar to everyone is the giving 
of passes. In the legislature of a Western State a number 
of railway lobbies keep clerks writing passes all the time. A 
single State legislator is said to have received and distributed 
a thousand passes in one session. These passes are even sent 
to people who do not ask for them, in the hope of winning 
their political support. In this State alone the fares repre- 
sented by these passes amount to hundreds of thousands of 
dollars. It is needless to say that the people pay for these 
free rides, but this is not the worst. It is a species of brib- 
ery by which the State is plundered, its government demoral- 
ized, and its citizens corrupted. It is astonishing that consci- 
entious people are so slow to recognize the nature of the crime 
in which they thus particij^ate. 

When public clamor at last secures the passage of a law 
the same corrupting agencies are turned against the officers 
charged with its execution. It would be hasty to conclude 
that anti-monopoly laws cannot succeed, but it surely cannot 
be claimed that they have so far succeeded. The lesson of 
State assistance, tax regulation, and statutory regulation is 
the same. When private interests become monopolistic and 
powerful they not only do not serve society reasonably, but 
all efforts to compel them to do so result in the corruption of 
government and in ignominious failure. Laws regulating 
labor are feasible and just because, laborers having little power 
to lobby and corrupt legislatures in their behalf, such laws 
are the concession of humanity, while laws favoring powerful 
monopolies are usually the price of a bribe. Laws opposing 
such monopolies are too often in turn only an occasion — per- 
haps even a bid — for bribes in their application. Would it 
be strange if a person unbiased by prejudice or self-interest 
should conclude that private interests which have grown 
powerful enough to deny responsibilities and defy regulation 
should pass loholly under public control ? 
30 



294: Outlines of Economics. 



SUMMARY. 

1. statutes regulating industry were generally abolished early iu the pres- 
ent century, owing to reliance on competition. 

2. Legislation protecting labor was soon found necessary, however. 

3. Under pure competition the least scrupulous competitor tends to im- 
pose his moral standard upon the rest. 

4. Women and children especially require protective legislation. 

5. Law can feasibly limit the hours and days of labor, which can other- 
wise be limited only by unanimous agreement. 

6. Labor contracts can be somewhat, though not extensively, regulated 
by law. 

7. Legal regulation of monopolies and trusts has been extensively tried, 
with most unsatisfactory results. 

QUESTIONS. 

1. What was relied on to regulate industry during the Middle Ages? dur- 
ing the first part of this century? With what result ? 

2. What classes have proved unable to do without legal protection ? 
Why? 

3. What kind of a competitor has the advantage under pure competition ? 
Why? 

4. What should the law aim to secure for women? for children? Why? 
What is the result of their extensive employment in industry? 

5. How should daj^s and hours of labor be regulated? Why? Labor 
contracts ? Why ? 

6. What is the result of attempts to regulate monopolies by law ? Why ? 

LITERATURE. 

See works already cited, and 

Jevons, W. S. : The State in its Relation to Labor. 



CHAPTER Vll. 

STATE MANAGEMENT OF INDUSTRY. 

In the preceding chapters we have considered the relations 
of government to private industry, and have discovered two 
connections in which our history has been a disastrous fail- 
ure. These are, first, assistance in enterprises which are 
too great or too general in the benefits they confer to make 
private enterprise adequate; and, second, the regulation of 
private enterprises which have become so powerful and des- 
potic as to be a menace to society. If we examine closely 
into those cases of corruption which we have considered we 
shall find one characteristic pervading all. The enterprises 
in question are in their nature monopolies, or they are made 
so by the action of government. By a monopol}^ is meant a 
business which is not limited by competition. It may con- 
sist of a single firm or of many firms bound by an agreement 
not to compete*. If this agreement is definite and formal it 
is called a pool or combine ; if the parties merge their sepa- 
rate existence in that of a single larger corporation this is 
called a trust. The principle is the same in any case. The 
monopolistic concern, the pool and the trust, all agree in 
this, that they charge what they please. The limitations to 
this principle we have alread}^ considered. But while mo- 
nopoly price has a natural limit it is a limit much less favor- 
able to the public than that set by competition. The result 
is that monopoly business creates increasing inequalities in 
the distribution of wealth and corresponding sufi'ering on 
the part of the poor. Monopoly is inherently objectionable. 
Even if its owners are magnanimous and unselfish, which has 
hardly been true up to date, the centralization of the power 
of industry in a few hands, with its enormous resulting 



296 Outlines of Ecunomios. 

wealth, is undemocratic, and makes the many dependent upon 
the few. Such a dependence, not of man uj^on society, but 
of society upon a despot, would be a paternalism more odious 
than any that a government has ever offered. The reaction 
against the mediaeval system w^hich we have before consid- 
ered was due in no small degree to the monopolies estab- 
lished by royal grant, which were one of its most hateful 
features. The experience of all the past teaches one lesson: 
private monopolies are intolerable in a free country. 

There is a group of industries which we may call natural 
monopolies, because they are monopolies by virtue of their 
own inherent j)roperties. They are of vast importance, and 
the propej-ty wliich they own is in value a considerable pro- 
portion of the property of the United States, and, in fact, of 
any modern country. The monopolistic character of these 
enterprises can be j)lainly seen by reference to their chief 
characteristics : 1. They occupy peculiarly desirable spots 
or lines of land. 2. They can increase the service or 
commodity which they supply without a corresponding in- 
crease in capital. 3. The service or commodity which they 
supply must be used in connection with the plant which sup- 
plies-it. 

We will examine briefly these characteristics. If there is 
only one spot or line of land for the business it is manifest 
that the enterprise having the position must be a monopoly; 
but when there are several spots or lines of land one may be 
much better than another. Usually there is room for only 
one street-car company in a street, or one elevated rail- 
way over a street, and the comj^any having the possession 
has, so far as that street is concerned at least, a complete 
monopoly. Often the possession of a few streets gives con- 
trol of an entire section of a city, or, indeed, the whole city, 
so that any extension of the service must come from the com- 
pany already in possession. This is, for example, very nearly 
the position of New York city with respect to the elevated 
railways. The great steam railways occupy peculiarly favored 
spots or lines of land to an extent which is not generally 



State Management of Industry. 297 

appreciated. Of course along a considerable distance of their 
line duplication, so far as land is concerned, seems easy enough ; 
but there are certain very important points at which such is 
not the case, as a pass through a mountain which may be very 
narrow. It frequently happens that a railway which passes 
between a mountain and a river occupies the only line which 
is available without enormous cost; in cities, too, a company 
early in the field often secures a valuable line or tract of land 
which cannot be duplicated. This is the case with the New 
York Central and Hudson River Railway, in New York city, 
and with the Pennsylvania system in Philadelphia, and to 
some extent also in Baltimore and in Washington. 

The fact that the industry can be increased without a pro- 
portionate increase of capital makes it, of course, cheaper for 
one company to do a given amount of business than for two 
or more. It is on this account that monopolies have been 
called industries of increasing returns. To what extent 
economy is secured by increasing the magnitude of a business 
is in many branches of industry more or less open to question, 
but in the case of the industries under consideration it is not 
only cheaper to manage a business as one whole, but very 
muc'i cheaper ; consequently there is always an inducement 
held out to various companies or persons engaged in a busi- 
ness which is a monopoly in its own nature to effect a combi- 
nation. The result of a combination is increased gains, and 
as the purpose for which the business is followed is gain there 
is a constant force contending to bring all those together who 
are in this business, and this force ultimately overcomes the 
most serious obstacles. 

If the commodity could be separated from the plant 
furnishing it the monopoly would be far more difficult and 
perhaps impossible. If the German telegraph service could 
furnish us with telegrams in the United States, as a German 
manufacturing establishment can send us its products, we 
would of course use the German service, and in the United 
States often save seventy-five per cent ; but telegraphic service 
can be only furnished where the plant is. The service which 



298 Outlines of Economics. 

a railway furnishes must be used in connection with the rail- 
way itself. 

The monopolistic character of these enterprises is further 
demonstrated by experience. Competition has been tried in 
all these branches of business and has never been permanently 
successful. If we see a given experiment tried a thousand 
times by different j)ersons under every conceivable circum- 
stance and find that it never succeeds we naturally draw 
the conclusion that the effort is a hopeless one. This de- 
scribes the situation with respect to the gas supply. It has 
been tried in certain cities a half a dozen times, and it is 
probably an underestimate to say that altogether the experi- 
ment in various countries has been tried a thousand times, 
and no one can point to an instance of successful perma- 
nent competition. The experiment has been tried over a 
hundred times in the telegraph business, but has had the 
same outcome, namely, monopoly. In France and England 
the outcome of attempted competition among railways has 
been monopoly, and the reason why many people in the 
United States still believe in the possibility of competition 
among railways is because the development of the railway 
business is not yet complete, and it is not generally appreci- 
ated to what extent the railway business is conducted even 
now by agreement. A striking instance was recently afforded, 
however, when it transpired that certain railways in the 
Northwest had agreed not to exceed a given rate of speed 
between Chicago and Minneapolis. 

It is perfecMy plain that monopolies cannot be left to 
manage themselves. What shall be done ? Two answers, 
and only two, are possible. Such enterprises must be regu- 
lated by the State or they must be owned by the State. State 
regulation we have already considered at length. Its object 
is to secure a safe, efficient, and inexpensive service of the 
public. What has been the result? Last year 7,029 persons 
were killed and 33,800 injured by our railways. Such a record 
would appall the least civilized State of Europe. It has been 
claimed that it is more dangerous to be an employee on an 



State Management of Industry. 299 

American railway than to be a soldier in the Prussian army 
in time of war. All this, too, in face of the fact that safety 
appliances are well known which would save nearly all of 
this destruction. But to adopt these would cost money. 
Electric wires are exceedingly dangerous and should be run 
underground, but companies, with few exceptions, have suc- 
cessfully resisted this improvement. It would cost money. 
It is idle to say that society does not desire these improve- 
ments. It does desire them, and our legislators desire them, 
but they are at the mercy of the lobby. This is a principal 
point under the head of safety. Is it safe to have railway 
lobbies in our State and national legislatures which con- 
trol legislation, not only affecting railways, but legislation 
of every kind, and make legislators their servants ? Such a 
despotism is a danger to society compared with which the 
killing of a few thousand innocent citizens each year maybe 
held to be a small affair, serious as the latter is. 

In the matter of efficiency, again, we cannot view the results 
of State legislation with complacency. Our railways, to be 
sure, where competition has not been suppressed on through 
lines, have in some particulars shown great enterprise ; but 
this is in part the result of a competition now fast dis- 
appearing, not the result of State regulation which must take 
its place as monopoly is established ; in part, also, the result 
of the fact that many Americans have means sufficient to 
enable them to pay for comforts and conveniences greater 
than those to which an ordinary ticket entitles the holder, 
and these conveniences and comforts are of special importance 
where distances are so great as in the United States. A con- 
siderable proportion of the lauded enterprise in American 
railways is seen in the provision of services and accommoda- 
tions for which an extra charge is made. The telegraph, 
Avhich has become fully monopolized, has persistently refused 
to adopt improvements which are continually introduced into 
the English service. This is the invariable spirit of monop- 
oly. We hear much about destroying private initiative and 
individual incentive. Private enterprise lohen it becomes 



300 Outlines of Economics. 

monopoUstiG ceases to he enterprising, and cannot he made so 
hy regulation. 

It is in the matter of* expense that our judgment of regu- 
lated private monopoly must be most severe. Our telegraph 
service costs twice what it ought, and is, of course, less pa- 
tronized and less serviceable for that reason. Our railway 
rates are needlessly high, according to the confession of prom- 
inent railway officials. Our municipal street-car service is a 
scandal and an oppression. Why do we not regulate prices 
as they should be ? Because government is "influenced," and 
the continuance of private monopolies will make this "influ- 
ence" ever more powerful and subtle. Added to all this 
overcharge there is the enormous waste of millions of caj)ital, 
which has been sunk, and is still being sunk, in efibrts at 
hopeless competition, which has been a favorite means of 
" regulating " monopoly. 

The other resource is State ownership and direct manage- 
ment. The aj^plications of this principle are numerous in 
Europe and are increasing rapidly in America. In most 
countries in Europe the State owns the railways and all own 
the telegraph. 

Our cities long ago discovered that the water supply was 
so essential that it could not be intrusted to private enter- 
prise, and while private ownership of water works is not un- 
known it is distinctly a discarded policy.* Municipal owner- 
ship of lighting plants is rapidly increasing, and municipal 
ownership of street railways has begun. What are the re- 
sults of this policy ? It must be remembered that we are 
comparing a young policy with an old one, and that a policy 
in the experimental stage is usually more expensive than in 
that of full development. We must consider, again, the three 
points of safety, efficiency, and expense. 

The Prussian railway statistics show that in 1888-89 one 
sixth as many persons were killed and one thirteenth as many 

* Irrigation works are indispensable in many parts of tlie United States, 
and it is especially important that they shonld be public property. To in- 
trust them to private enterprises is to disregard the teachings of history. 



State Management of Industry. 301 

injured in proportion to the number of passengers as in the 
United States. It has been objected that the average pas- 
senger in the United States travels much farther than in 
Prussia, and so the chances of accident are increased ; but, on 
tlie other hand, it must be remembered that the population 
in Prussia is much denser, and that the number of crossings per 
mile and possible casualties is therefore much greater. The 
greater safety is due simply to greater care, which character- 
izes all branches of State industrial activity. The reason is 
clear: the private owner naturally considers immediate in- 
terests ; the State, from its greater perpetuity, is less con 
cerned in an immediate advantage ; the individual, again, 
has little interest in the general safety ; this, however, pro- 
foundly interests the State. * 

Under the head of safety must also be considered the re- 
lation of these great enterprises to social order. The ob- 
viously unfriendly relations between these corporations and 
their numerous and well-organized employees is a constant 
menace to the order of society. Strikes suspend traffic vital 
to public interest, and when prolonged and bitter, result in riots 
and train wrecking, imperiling the most important interests. 
Under State management such dangers are minimized. Gov- 
ernment employees do not strike or use dynamite. They are 
usually reasonably though not exorbitantly paid, and are not 
irritated by excessive toil, by oppressive conditions of service, 
or by the thought that unreasonable incomes are accruing, 
through their efforts, to private individuals. 

The question of efficiency is a much more disputed one. 
We are told that government enterprise is wasteful and un- 
enterprising, and that private enterprise under the spur of 

* Were not space too limited the many devices to insure safety of railway 
passengers in Prussia would be described. Some of them are quite un- 
known in the United States. Probably no observant traveler in that State 
fails to notice the great ingenuity displayed in securing safety. Tiiat greater 
regard for human life is displayed by government than by private corpora- 
tions is unquestionable, and, allhough little discussed, is one of tiie weightier 
considerations in the controversy of public versus private enterprise. 



302 Outlines of Economics. 

competition is the condition of efficiency. We have seen that 
in the cases under consideration competition is but partial 
and temporary, and that where it is absent private enterprise 
regularly takes as much and gives as little as it can. But, 
on the other hand, experience does not seem to bear out the 
charge made against government enterprise. The Prussian 
railways have constantly and rapidly improved their service 
since they were purchased by the government. It is claimed 
that on the whole trains are run faster and that fewer changes 
of cars are required for holders of ordinary first or second 
class tickets than on American railways, and this seems to be 
substantiated by a comparison of time-tables in the two coun- 
tries, with the added advantage that the Prussian trains are 
on time, as ours frequently are not. Of coarse German rail- 
ways, either under private or public control, will show Ger- 
man peculiarities, and the main question is whether, take 
it all in all, improvement has been as great under govern- 
ment as could have been anticij^ated under private enterprise. 
There seems room for little doubt on this j^oint. 

Our post office is a more efficient service by far than any 
private service in the country. It must be remembered in 
such comparisons that any private company charged with 
such service would cut off many routes which, in themselves, 
do not pay, and would be exceedingly loath to extend or im- 
prove the non-paying but important parts of the service. 
Compare the routes chosen by express companies with those 
followed by our postal service. The individual initiative 
which is so much urged in favor of private enterprise seems 
to have been far less active in the introduction of improve- 
ments in the case of express companies than in that of the 
post office. The management of municipal service in the 
lighting, etc., has proved more efficient than that of private 
companies, if we may judge from the testimony of those 
cities which have tried both methods and have almost, if not 
quite, uniformly preferred public ownership. This argument 
is made more conclusive when we consider the situation in 
which a managing official is placed. Under private manage- 



State Management of Industry. 303 

ment he is expected to make the largest possible amount of 
money for the stockholders; in the other case he must secure 
the most satisfactory service for the public. Which system 
will naturally defer most to public demands ? As a matter of 
fact, the prejudice against government management comes 
largely from experience with mixed enterprises^ not with pub- 
lic enterprises. 

In the matter of expense we can consider only certain 
cases where both systems have been tried and made compar- 
isons possible. This we find especially in municipal service. 
In nearly every case on record in which the two systems 
have been successively tried there has been a saving of ex- 
pense under public ownership, sometimes a very great sav- 
ing, and that, too, without reduced efficiency. More often, 
especially in the case of electric lighting plants, municipal 
ownership has been tried at the outset, and comparisons 
made with towns similarly situated show an almost invari- 
able advantage, usually very great, in favor of the city 
plants. It is astonishing how cheaply these services can be 
rendered when the issue of fictitious stock is prevented and 
profits are paid only on cost. A committee in Haverhill, 
Mass., report that in that State 62 cities having electric light 
plants under private ownership pay on an average 1105.13 
per year for each lamp of 2,000 candle power. In the same 
State 14 cities operate plants of their own at $55.12 per 
lamp. In 1892 Kansas City paid |200 per light ; Rutland, 
Vt., paid $280 ; San Francisco, $440.67. Many j^rivate com- 
]ianies, of course, work more reasonably. Mrovm''s Directory 
of American Gas Companies for 1892 reports 224 companies 
which furnish lamps at an average cost of $102.40, while 39 
cities widely distributed (all from which returns could be 
obtained) furnished their own lamps at an average cost, in- 
clnding intercfit, taxes, and depreciation, of $77.68. The 
lamps in the former case burned on an average 6.84 hours, 
and the latter, 7.9 hours per night. Allowing for this differ- 
ence, public lighting secured a saving of over thirty per cent 
as compared with private lighting. 



304 Outlines of Economics. 

Where railways have hecome public property not only 
facilities have been improved, but rates liave been reduced 
and revenues retained. In some cases reduced rates have 
resulted in large increase of revenues, as in Hungary. 

It is sometimes said that this country will never consent 

to raise by taxation the enormous sum necessary to buy the 

railways. No taxes are needed. If the government can 

secure the money at three per cent while railways pay six 

per cent or more the railways bought on credit would pay 

for themselves in less than a generation. Much the same 

would be true of the other monopolies we have considered. 

Very often, too, it is urged that public enterprise of this 

sort is contrary to the traditions of our government, which, 

it is asserted, was founded on the principle of unmolested 

private enterprise. But why was it so founded? Simply 

)ecause there were then no monopolies, no collective and 

ion-com]3etitive services where private ownership was danger- 

>us and public ownership a necessary safeguard. Enter- 

)rises such as then existed were naturally private. How 

were houses supplied with w ter and light? How were 

goods transported? And yet there was one collective 

service, the post office. Why was that not made private 

property ? 

It is in harmony with the principles of our institutions 
that there is a rapidly developing sentiment in favor of pub- 
lic ownership of those enterprises which from their nature 
cannot be subject to competition. These become more 
numerous and important and more dangerous in private 
hands as civilization advances. Public industry in the mo- 
nopoUstic and private industry in the competitive field seems 
to be the only feasible or natural laio. 

Forestry. — There are some other enterprises which, for 
various reasons, it is desirable that government should as- 
sume. In different countries the State is furnishing insur- 
ance of various kinds, and that successfully. Strong argu- 
ments, based both upon the nature of the industry and 
actual experience, can be adduced for the assumption of in- 



State Management of Industry. 305 

sarance by the State. The limited space of the present book 
will allow us, however, to discuss in this chapter only one of 
these other industries, and that one w^hich has immediate 
practical importance in the United States, namely, forestry. 
All governments are taking upon themselves the owner- 
ship and management of forests, but for reasons of a differ- 
ent nature from those which lead to oAvnership and manage- 
ment of businesses which are monopolistic. New York State 
has acquired forests in the Adirondacks and has entered 
upon forestry, having in her employ foresters. Bills have 
been brought before Congress which look to management of 
forests as a permanent function of our national government. 
Switzerland, France, and Germany are increasing the area 
of governmental forests. The reasons are very obvious 
when the conditions of silccessf ul forestry are examined. 
First of all, it may be said that rational forestry requires 
plans to be made for one hundred and twenty years in ad- 
vance. Trees must be planted to be felled at the expiration 
of that long period, for it takes that length of time for them 
to grow to their full size, and w^hen they are allowed to 
grow to full size the amount of timber needed can be groAvn 
on the smallest amount of land. Private individuals will not, 
however, invest money from which they expect to receive no 
return for over a century. Second, forests ought to be cul- 
tivated on a vast scale on land especially adapted for forests 
— land often good for nothing else — and certain great regions, 
like steep mountain sides and sources of streams, ought to be 
entirely covered with forests. Their climatic influences are 
generally believed to be important, and forests wath their 
leaves and undergrowth certainly prevent rainfall from 
rapidly rushing down mountain sides and deluging the coun- 
try below. Forests prevent a waste of soil. It is said that 
where forests have been rashly removed from mountain sides 
in Baden, Germany, and in Switzerland it will take three 
hundred years to repair the damage. Soil must be slowly 
formed again. Private individuals will not select for forestry 
vast tracts of land properly situated. In America farmers 



306 Outlines of Economics. 

have quite generally kept a few isolated acres in woodland, 
but this is not what is wanted. Very likely the land kept in 
trees is better adapted for something else, and forests may 
not be needed at this particular point. Third, it requires 
highly trained scientific men to take care of a forest. It is 
necessary to go through high schools, to follow a course for 
several years in a forestry academy, and then to supplement 
this by an apprenticeship of several years in practical work 
in forests. Only a State owning tens of thousands or hun- 
dreds of thousands of acres can train and organize a properly 
qualified body of scientific foresters. The difference between 
a forest which grows up wild and one which is developed under 
a proper system of culture is so great that the trained eye can 
detect the difference nearly as far as sight can reach, and it 
is probably safe to say that it takes twice as much land to 
supply a given need when forests grow up of themselves as 
where a rational system of forest culture obtains. Fourth, 
when forests are cultivated in large tracts, as they should 
be, covering perhaps an entire mountain, very considerable 
quantities of game can be grown, and this forms an impor- 
tant element in the food of a people. Our private system of 
forests in America results in an almost total destruction of 
game in the settled parts of the country. Fifth, although 
forests do not pay private individuals, the profits of Belgian 
forests, for example, not exceeding, it is said, one per cent 
on their selling value, they do pay the people as a whole, on 
account of their general beneficial effects. 

More might be said on this topic were not space too 
limited. It is manifest from this that petty measures w^hich 
some of our States are introducing, like tax exemption for 
planting a few trees or covering even a few acres with trees, 
will never accomplish anything of economic significance. 
Even " arbor dsijs " are of little account save for their edu- 
cational value. On that account, and on that account alone, 
unless it be perhaps for the sake of another holiday, they 
should be encouraged. 



State Management of Industry. 307 



SUMMARY. 

1. Private monopolies are inherently objectionable and are intolerable in 
a free country. 

2. A business which controls a iDCCuliarly desirable location, which can 
increase its service without corresponding cost, and which supplies a service 
available only in connection with its plant, is inherently a monopoly. 

3. Railways, gas works, etc., have proved incapable of control by com- 
petition. 

4. Under private ownership they have not secured the maximum of 
safety, efficiency, or economy. 

5. Private enterprise when it becomes monopolistic ceases to be enter- 
prising, and cannot be made so by regulation. 

6. Public management of railways in some countries, and of municipal 
monopolies in American cities, has proved more satisfactory in all respects. 

QUESTIONS. 

1. Why are private monopolies objectionable? 

2. What is a monopoly ? What conditions are necessary to constitute a 
monopoly? What industries especiall}^ present these conditions? 

3. What has been the result of private ownership in these industries as 
regards safety? efficiency? economy? 

4. What has been the result of public ownership in each case? Where 
has it been tried ? 

5. What is the necessary condition of enterprise under private owner- 
ship? 

6. What is the proper field of private enterprise ? of public enterprise ? 

7. What special reasons exist for government forestry? 

LITERATURE. 

Works already cited, and 

Adams, H. C. : Relation of the State to Industrial Action. 



CHAPTER VIIT. 

SOCIALISM. 

The Elements of Socialism. — Those who desire indus- 
trial democracy — not prematurely, but in its own time — are 
many, and they include perhaps most of the best economists. 
There are, however, different ways by which it is proposed 
to attain the desired goal. One of these ways is voluntary 
cooperation for all competitive pursuits and governmental 
activity for monopolistic undertakings. Another one of these 
ways is called socialism. Socialism means coercive cooper- 
ation, not merely for undertakings of a monopolistic nature, 
but for all productive enterprises. Socialists seek the establish- 
ment of industrial democracy through the instrumentality of 
the State, which they hold to be the only way whereby it can 
be attained. Socialism contemplates an expansion of the 
business functions of government until all business is ab- 
sorbed. All business is then to be regulated by the people 
in their organic capacity, each man and each woman having 
the same rights which any other man or any other woman 
has. Our political organization is to become an economic 
industrial organization. Private property in profit-produc- 
ing capital and rent-producing land is to be abolished, and 
private property in income is to be retained, but with this 
restriction, tfiat it shall not be employed in productive en- 
terprises. What is desired, then, is not, as is supposed by 
the uninformed, a division of property, but a concentra- 
tion of property. The socialists do not complain because 
productive property is too much concentrated, but because 
it is not sufficiently so. 

There are four elements in socialism, namely, first, the 
common ownership of the means of production ; second, the 



Socialism. 309 

common management of these means of production ; third, 
the distribution of annual products of industry by common 
authority ; fourth, private property in the greater portion of 
income. Socialists make no war on capital, strictly speak- 
ing. What socialists object to is the private capitalist. They 
desire to nationalize capital and to abolish capitalists as a dis- 
tinct class by making everybody, as a member of the com- 
munity, a capitalist ; that is, a partial owner of all the capi- 
tal in the country. 

Socialists say that labor creates all wealth. No rational 
socialist means thereby to deny that land and capital are fac- 
tors of i^roduction, but as they are passive factors they hold 
that their owners ought not to receive a share of the product 
unless they personally are useful members of the community. 
Labor is the active factor, and all production is carried on 
for the sake of man. Land and labor are simply the tools of 
man. Socialists admit that the owners of these tools must 
receive a return for them when industry is organized as it is 
now ; hence they desire that these tools should become com- 
mon property. They wish to make of universal application 
the command of the apostle Paul, " If a man will not work, 
neither let him ea.t." 

Distributive Justice. — The central aim of socialism, the 
pivotal point, is distributive justice. It proposes to distrib- 
ute products justly. The ideas of socialists are, however, 
not harmonious as to what constitutes justice. Some say 
equality is justice ; others, distribution in j^i'opoi'tion to real 
needs, so that each may have the economic means for his 
completest development. Still others say justice means dis- 
tribution in proportion to merit or service rendered, but the 
service of the individual, not of his ancestors. Bequest and 
inheritance, except of articles of enjoyment, like pictures, old 
family plate, books, household furniture, possibly also the use 
of a house as a home, must be abolished. Socialism allows 
no inheritance which renders labor needless. 

Socialism an Extension of Existing Institutions.— 
Our government owns the post office; most governments own 
. 21 



310 Outlines of Economics. 

the telegraph. Nearl}^ all own the wagon roads. Some own 
the canals and railways. Many governments own factories. 
Probably every national government does at least a little 
manufacturing. Most governments cultivate forests, and 
some cultivate more or less arable land. We have only to 
imagine an extension of what already exists until govern- 
ment cultivates all land, manufactures all goods, conducts all 
exchanges, and carries on, in short, every productive enter- 
prise, and we have socialism pure and simple. 

At the present time we have private property in nearly all 
the income of society, or the national dividend, as it is called. 
But some things are used in common, and afford what may be 
called a common income. Public parks, public schools, public 
galleries, and the like are of this character. Private property 
in income would continue under socialism, and there would 
be provision of private property for everyone, so that in this 
respect socialism emphasizes and extends the idea of private 
property. On the other hand, socialism would naturally 
continue and intensify the tendency to enjoy things in com- 
mon. This is what is meant by saying that socialism signi- 
fies private property in the greater proportion but not all of 
income. 

The Strength of Socialism. — Socialism makes perhaps 
its strongest claim in its plea, first, for a scientific organiza- 
tion of the productive forces of society, and, second, for a 
just distribution of annual social income. It is said that the 
present production of economic goods is small in proportion 
to population, but socialism replies : " Naturally enough. 
Competition is wasteful. Two railways are built where one 
would suffice. Two trains run parallel between two cities 
where one would serve the public equally well. Three times 
as many milk wagons, horses, and drivers are required to 
serve the people with milk as would sufiice if the milk busi- 
ness were organized like the mail distribution business in 
cities. Look at the shops, wholesale and retail, and see the 
waste of human force! Without competition the whole dry 
goods and grocery business could be carried on with a third 



Socialism. 311 

of the present economic expenditure of force. Reflect on all 
the idle classes in modern society. Socialism would set every- 
body to work, and, making each one dependent on his own 
exertions for success, would stimulate all energies." The 
argument is continued after that fashion, and it is a telling 
one. It does not prove the point unless we grant two things: 
first, that, the present waste and idleness cannot be suppressed 
or greatly diminished w^ithout a departure from the funda- 
mental principles of our present industrial order ; second, 
that socialism is practicable. 

Justice is a strong plea in the program of socialism, and 
it cannot be for one moment claimed that each one's income 
is at present in proportion to his services to humanity. In- 
come in proportion to industrial merit is attractive to an 
ethical sentiment. But cannot we approximate more nearly 
to that than at present by social reform ? And by social 
reform is meant the improvement of existing institutions, 
but not their abandonment. No doubt the idle man is mor- 
ally a thief. He receives, but gives nothing in return. Any 
man who by past services of his own has not earned the right 
of repose is a shameless cumberer of the earth, unless, indeed, 
he is physically or mentally incapacitated for useful employ- 
ment. Would the v/orld suffer if you should die ? That 
is the test. If you merely clip coupons, then no one would 
miss you. Others would willingly relieve you. But your 
service need not be manual toil. 

Dr. James Fraser, the late Bishop of Manchester, England, 
recognized the obligations of j^ersonal service, but he did not 
in consequence favor socialism. He argued in this wise : 
" Most of us are by our necessities obliged to render services 
to our fellows. Some of us, however, have inherited or re- 
ceived money in some way without a return on our part. 
We are placed by God on our honor. It is now a matter, not 
of physical compulsion, but of honor with us to serve our fel- 
lows." ^ What is here said would apply, of course, not merely 

* These are not the bisliop's exact words. It has been many years suice 
the author has read them, but he lias reproduced the idea. 



312 Outlines of Economics. 

to those who receive wealth by inheritance, but to those who 
become wealthy by the discovery of valuable treasures, like 
oil, natural gas, gold, minerals, etc., on or under soil, which 
they own, or by the mere growth of cities, which adds im- 
mensely to the value of land. Legally the wealth is mine, 
but morally it is simply a new opportunity for me to help 
forward the progress of humanity ; for ethically I myself am 
not my own. 

Social Heform. — We may likewise inquire whether with- 
out a departure from the institution of private property the 
laws of bequest aud inheritance may not be so changed as 
to bring about a fairer distribution of products ; whether, 
also, by public ownership and management of natural monop- 
olies much of the waste of present private competition may 
not be avoided. These and a multitude of other questions 
suggest themselves. Social reform seems likely to accom- 
plish more valuable results than socialism. What is 
needed is a free and peaceful evolution of industrial insti- 
tutions, but not a radical departure from fundamental insti- 
tutions. 

The Weakness of Socialism. — It does not appear clear 
to the author how socialism could be made to work in actual 
life. The danger to freedom seems a very real one. It is 
frankly admitted that up to a certain point there is a tend- 
ency on the part of government to imj^rove as its functions 
increase. But Avould this hold with the indefinite extension 
of the sphere of government ? Let us admit that as our 
livelihood would depend on the efficiency of government all 
tlie force and energy which now go into private service 
would be turned into public channels. But what would hap- 
pen if, in spite of all precautions, some unscrupulous combina- 
tion should secure the control of government ? There would 
be no standing-ground for effective opposition outside of gov- 
ernment, for dismissal from the service of govei-nment would 
mean a cessation of opportunity to gain a livelihood. If all 
production is to be carried on by public authority there could 
be no private press for criticism; and it is to be feared that 



Socialism. 313 

unwelcome views, which after all may be the true ones, would 
fare much worse than at present. 

The domination of a single industrial princijjle is also dan- 
gerous to civilization. It has been held that the domination 
of a single social principle has led to the downfall of older 
civilizations, and a distinguished American * has expressed the 
fear that the private business principle, with what naturally 
goes with it, called by this scholar " mercantilism," threatens 
American civilization. Now what is wanted is a coordina- 
tion of the two principles, the principle of public business 
and that of private business. It is desirable that some should 
serve the public in an official capacity. Some are adapted 
for that. It is desirable that an ample field should be left 
for those who prefer private initiative and activity. Thus 
only will our civilization be rendered rich and full. 

Character of Socialists. — Socialism has rendered good 
service by calling attention to social problems, by forcing 
us to reflect on the condition of the less fortunate classes, 
by quickening our consciences; also by helping us to form 
the habit, acquired by few as yet, of looking at all questions 
from the standpoint of the public welfare and not merely of 
individual gain; finall}^, by calling our attention to the nature 
of the industrial functions of government and helping us 
to separate rationally the private industrial sphere from the 
public industrial sphere. Socialism as a theory of society 
cannot, of course, be regarded as in any sense morally blame- 
worth}^ It has been advocated by good men and by bad 
men also. To-day it numbers earnest Christians and sincere 
ministers of the Gospel among its adherents. As there are 
good republicans and bad republicans, there are good social- 
ists and bad socialists. If every time a republican was guilty 
of a criminal act all the newspapers said, "That is what 
comes of being a republican," we might begin to think all 
republicans bad men. It is a mistake to suppose that social- 
ists belong to the criminal classes. Those who have worked 

* Hon. A. D. White, ex-President of Cornell University in an excellent 
address entitled " The Message of the Nineteenth Centnr}^ to the Twentieth." 



314 Outlines of Economics. 

among the criminal classes and carefully studied them will 
tell us that almost no socialists are found among them. At 
the same time it must be said that the socialists have been 
most unfortunate in a large proportion of their public repre- 
sentatives, especially of their noisiest representatives, who 
have secured the largest amount of attention. Some of 
them have been vicious men, and many of them have been 
bitter and vindictive. Needless animosity has been aroused 
and class hatred nourished. The cause of progress has thus 
been seriously injured. Furthermore, a number of questions 
having no connection with socialism have been, even by 
socialists, not infrequently associated with it. Infidelity and 
free love may be mentioned. Of course these have nothing 
to do with socialism. Socialism has done harm on account of 
the manner in which it has been too frequently presented, and 
it has also accomplished good, but the best effects of socialism 
have been its indirect and not its direct consequences. 

Anarchism. — In contrast with the socialists there are 
those who hold that if all government were abolished men 
would freely and spontaneously form cooperative groups 
which, federated, would manage all production. These men 
attack government and deny the moral right of man through 
government to exercise authority over his fellows. These 
are the anarchists, sometimes called anarchist-socialists. The 
writer frankly confesses his inability even to imagine how 
this kind of socialism could be made to work in actual life. 

Commnnisni is an older term not now often used. It 
has been employed in the past to designate an extreme kind 
of socialism. Some writers have called violent schemes of 
radical social reform communistic, and reserved the term so- 
cialistic for the more conservative plans of reconstruction. 
All the existing communistic societies in the United States are, 
however, composed of peace men, who do not believe in war 
but in non-resistance. It is, perhaps, as well to abandon the 
attempt to make a distinction between communism and so- 
cialism, and to drop the word communism. Collectivism is 
often used as a synonym for socialism, particularly in France. 



Socialism. 315 



SUMMARY. 

1. Socialism is coercive cooperation in all industrial enterprises. 

2. Socialists admit private property in income but not in means of pro- 
duction. 

3. Socialists claim that labor produces all wealth, and they aim at a dis- 
tribution based on justice. 

4. Socialism is but an extension of existing institutions. 

5. The strength of socialism lies in its proposed saving of waste and 
its juster distribution. 

6. Its weakness hes in its almost impossible requirements of virtue and 
the absolute dependence of all upon this. 

1. Anarchism is the opposite of socialism, a belief in the needlessness of 
government. 

8. Communism is a vague and nearly obsolete synonym for socialism. 

QUESTIONS. 

1. Define socialism, communism, anarchism. 

2. What is the attitude of socialism toward private property ? 

3. What effect would successful socialism have on production? on distri- 
bution ? 

4. What difficulties are in the way of the attainment of the socialistic 
ideal ? 

5. What is the character of socialists ? 

6. What socialistic features now exist in our government? Do they in- 
crease or diminish? 

1. What is the origin of wealth according to socialists? Are they cor- 
rect? 

8. Why is anarchism unfeasible? 

LITERATURE. 

Bellamy, E. : Looking Backiuard. 

Marx, Kail: Capital. 

Gronlund, L. : Cooperative CommomveaUh. 

Schaefle, A. : The Quintessence of Socialism. 

Laveleye, E. de : Socialism of To-day. 

Rae, J. : Contemporarij Socialism. 

Browne, T. E. : Studies in Modern Socialism and the Labor ProUem. 

Kirkup, T. : Lnquiry into Socialism. 

Ely, R. T. : French and German Socialism ; Labor Movement in America. 



PART IL 

PUBLIC EXPENDITURE. 



CHAPTER I. 

INTRODUCTORY. 

In Part I we considered the relation of the State to the 
productive activities of society. We now come to a part of 
our work which is usually called public finance. By public 
finance we understand that part of economics which deals 
with the acquisition of the public revenues, their management, 
and their expenditure. The remainder of the present book 
deals with what we may in a broad sense call public finance, 
although other than purely financial considerations enter into 
our treatment. 

Investment and Expenditure. — As a result of what 
has gone before, we have reached the conclusion that as a 
rule private enterprise should manage the various competitive 
industries, but that industries not subject to competition are 
best managed by the State. In the management of such 
enterprises the State will necessarily invest immense amounts 
of capital, but these transactions do not come under the head 
of public expenditure as the term is here used. When we 
lend money we do not call it spent, nor yet when we use it to 
buy productive property. Such uses are investments, not ex- 
penditures. By an investment we mean any outlay of capital 
which returns a direct income equal to current interest. An 
expenditure is an outlay which yields an indirect income 
only, or is for the purpose of satisfying wants directly. 

Any public enterprise may be managed either as an invest- 



Intkodtjctory. 317 

ment or as an expenditure. If the service rendered is sold 
to the individual consumer at a price which covers cost and 
affords a reasonable profit it is an investment. If the service 
is furnished free and the expense paid by taxation or other 
revenue it is an expenditure. Still a third method is to com- 
bine the two, furnishing the service, not free, but at less than 
cost. State railways and municipal lighting plants are exam- 
ples of investments. The public roads are examples of expen- 
diture. The post office is a combination of both. We do 
not here include the entire outlay for the postal service under 
expenditures, but only the deficit which is annually covered 
by an appropriation. On the other hand, if a public invest- 
ment yields a surplus it is classed as revenue. 

Whether an enterprise should be managed as an investment 
or an expenditure, or both, is purely a question of its nature 
and the result to the general welfare. If it is something 
which men need to be encouraged to use it should be made 
cheap without regard to cost. If it is something the use of 
which needs restraint it should be made dear equally without 
regard to cost. For example, it would be possible to charge 
an admission fee for entrance to the public parks, but such 
an effort to make the parks pay for their maintenance would 
simply^ keep people out of them, and especially those who 
most need to frequent them. Here is a case where peoj^le 
need to be encouraged to use a public service, and conse- 
quently no charge is made for it. The postal service is 
another case where encouragement is needed and restraint as 
well. Ease of communication is highly important, but no 
one can doubt that if no charge were made the mails would 
be unprofitably used and waste incurred. Our own govern- 
ment has thought best to put the charge low without remov- 
ing it and to meet a small part of the outlay by expenditure. 

Water is a similar case. Its use needs encouragement, but 
to furnish it free would result in wasteful use. A small 
charge usuall}^ makes people more saving. Municipal light- 
ing is usually made to pay cost, and often a considerable 
revenue. The same is true of street cars. As an extreme 



318 



Outlines of Economics. 



example of the investment principle may be mentioned State 
monopolies of intoxicating liquors and tobacco. Where such 
monopolies exist prices are put far above cost, as the use of 
these articles requires strong discouragement. In every in- 
dustry a point will be found where the service will confer a 
maximum benefit upon society, and here the price should be 
fixed, no matter what the cost. Roads, harbors, lighthouses, 
schools cost much money, but it is very generally held tliat 
they should be free. It costs but little to carry a letter, but 
everyone believes that the sender should pay something for it. 
Increase of Public Expenditure. — There is a distinct 
tendency in highly civilized societies to increase public ex- 
penditure. The expenditures of England increased forty-six 
times between 1685 and 1841, while the population only 
trebled. The French budget in 1828 reached the sum of a 
thousand million francs, and people were alarmed. Since 
then it has passed three thousand millions, and including local 
expenditure, four thousand millions. The State taxes of Ohio 
increased forty-six times in sixty years, and local taxes over 
one hundred times. The expenditures of the federal govern- 
ment are shown in the following table : 



Years. 


'"ivll Establishment. 


Total Expenditures 
less interest on the 
debt. 


Net ordinary Total 
Expenditure includ- 
ing interest, but not 
bond purchases. 


1828 

1844 

1860 

1887 

1892 


$3,676,0.53 
5,645,184 
27,977,978 
85,264,825 
99,841,987 


mil 


$16,394,842 

22,483,560 

63,200,875 

267,932,180 

345,023,331 





The first impression one receives from such facts is one of 
alarm, and there are many people who see in this a sign of 
demoralization. But we must examine carefully these facts 
before we reach a conclusion as to their meaning. Increased 
expenditure on the part of government may mean either in- 
creased costliness of service or increased cmiount of service. 
The prejudice against government expenditures arises from 
a confusion of these two things. If the State does no more 



Introductory. 319 

for lis than formerly, and yet spends more of our wealth in 
doing it, then indeed there is reason for complaint and alarm, 
as there is also if expenditures exceed capacity and bank- 
ruptcy or repudiation threatens us. But if government 
doubles its expenditures and at the same time trebles its serv- 
ice to us we have reason for satisfaction. It is not possible 
for us to enter into an exhaustive examination of this ques- 
tion, but there is abundant evidence that the service of 
government has been improved in extent and in quality enor- 
mously during this period of increased outlay. Compare our 
postal service or our educational system with that of fifty or 
a hundred years ago. When was ever a letter carried so far, 
so quickly, or so cheaply as now? When have equal educa- 
tional advantages ever been had at so low a price as now ? 

Public and Private Expenditure. — W^e must not for- 
get that wealth is to be consumed with a view to the satis- 
faction of human wants. An increase of expenditure is a 
good thing if the increase is wisely spent. This brings us 
to tlie question which is vital to our whole subject. Do 
we get more from public or from private expenditure ? On 
this point we have long been in the habit of feeling rather 
than thinking. We dislike to j^ay taxes. The things which 
taxes buy we do not carry home in our pockets or have " all 
to ourselves," and we feel as if taxes were so much pure loss. 
Of course we know better, but we act as if we did not. It 
behooves us to think very carefully on this point, for some 
of the most momentous problems of our day are here in- 
volved. Let us notice the principal differences between pub- 
lic and private expenditure. 

Pahlic Expenditure is Inclusive, Private JExpeyiditure Ex- 
clusive. — A private citizen buys a beautiful painting for ten 
thousand dollars and puts it in his house, where he and a few 
friends can see it. Perhaps a thousand people see it in a 
year. The same picture in a public gallery is seen by all 
who wish, say a hundred thousand persons per year. Where 
does it do the most good ? Or look at it from another stand- 
point. Suppose interest, insurance, etc., amount to ten per 



3^0 Outlines of Economics. 

cent. It costs the owner a thousand dollars to keep a picture, 
or a dollar for each person who sees it, while in a public gal- 
lery the expense is one cent each. The wealthy owner who 
pays ten thousand dollars for the picture could see it as 
often as he liked in the public gallery by paying a single 
extra dollar in taxes. If it be right for a wealthy man thus 
to imprison a world treasure away from the public one thing 
is sure, that system is better which puts things where they 
will do the most good. But our picture problem brings us 
to another difference between private and public expenditure. 

Public Expenditure is Cumulative in its Hesults. — Suj)- 
pose the hundred thousand people who visit our art gallery 
have an average of a dollar apiece to spend on art. What 
can each one buy? A cheap chromo or engraving. But 
suppose they combine. They can buy an immortal work of 
art. Let a hundred thousand people spend a dollar apiece 
in beautifying their front yards and the result will scarce be 
noticed. Let them combine and they can create a park 
which will change the aspect of the j)lace and increase the 
value of property far more than it has cost. N^or is it alone 
in art and nature that this cumulative value of public service 
appears. In Baltimore the mediaeval custom prevails of 
compelling each man to sweep the street in front of his own 
house. It costs many times what public service would cost, 
and is not half as efficient. The meaning of our enlarging 
public expenditures is simply this, that year after year we 
discover new methods of associated economy or a new serv- 
ice. Of course we must remember that many services gain 
nothing by consolidation, and such should and do remain 
private ; but the great gains of a higher civilization are pre- 
cisely of this kind which are impossible without vast coor- 
dinated resources. These are by far the most profitable 
expenditures we can make. A dollar spent in wisely used 
taxes brings to the citizen sometimes ten, sometimes a hun- 
dred times as much as if spent in any other way. 

Opposition to Public Expenditures. — It is urged that 
government spends unwisely, but how about the average cit- 



Introductoky. 321 

izen ? Does not the average competency of the State in coun- 
tries like England, Germany, and the United States to spend 
wisely, even allowing for dishonesty, exceed that of the 
average individual ? Where do we see more absurd " finan- 
ciering" than that of private individuals, even judged by 
their own standard of interests ? * 

The second reason why people oppose public expenditure 
is ignorance. The public expenditures which offer such im- 
mense benefits are, on the whole, new developments. To be 
sure, cases like Athens may be cited in the past, where in the 
days of Pericles one third of the public revenues was ex- 
pended in art, resulting in a public education which it has 
been claimed made an Athenian gamin more of an artist 
than many a modern man of learning ; but such cases are 
exceptions. Our modern civilization has an immensely 
broader ideal than that of Athens. We seek not merely 
art, but comfort, health, security, virtue, intelligent citizen- 
ship, culture, education, and, in short, everything that makes 
for human well-being, and that not only for a relatively few 
citizens with an excluded mass of slaves, but for all. No 
such attempt was made in the past by public or associated 
action, and no such end was attained save by a small num- 
ber who made it a point to monopolize their advantages. 

The third reason for popular prejudice is a false concep- 
tion of the character of government. We are but recently 
become familiar with the fraternal State. Of old the State 
centered in the ruler, and too often his theory of govern- 
ment was that of Louis XIY, "I am the State." The peo- 
ple were not citizens, but subjects, and existed for the sake 
of the ruling class. A large part of public expenditure, 
under such circumstances, was a loss to the people. When 
taxes were increased it meant too often another palace for 
the king, or more banquets and wasteful luxury. Subjects 

* Much is said about dishonest transactions in government, but how 
about transactions in our Stock Exchange ? The average congressman is 
as honest as the average merchant would be if obhged to manage monopo- 
lies and "regulate" unscrupulous private despotisms. 



322 Outlines of Economics. 

have become citizens and rulers, and with all recognition of 
the weakness and corruption of government there is little 
room for doubt that public expenditures are more general in 
their benefits than private expenditures. When we consider 
their inclusiveness and their immense cumulative power we 
are tempted to draw this conclusion: If govemynent is as 
holiest and competent as the society it represents, the greater 
the proportion of public to private expenditiire which can he 
permanently maintained, the better. 

Probably most readers will feel that some qualifications 
are required, even if they do not at once know what they 
are. We must acknowledge that the above is a high ideal. 
It requires close examination of accounts and great watch- 
fulness to intrust large consumption to the public. Un- 
bridled public extravagance and loose financial methods can 
soon ruin a great commonwealth, whereas the damage of 
l^rivate prodigality is more restricted. The dread of large 
expenditures in the United States rests in part on waste and 
fraud in public finance in the past. 

Another qualification is suggested by the danger that very 
large taxation may paralyze private industry. Thus we say 
that not more must be taken than can be permanently taken, 
which means that we must not begin an exhaustion of our 
sources of supply. We can also add that we cannot take moi'e 
than the state of public opinion at the moment will tolerate. 

Still another qualification occurs when we remember that 
if wealth is wasted in private hands it is sometimes in such 
hands expended with greater wisdom than could be antici- 
pated from public authorities. It is the function of wise and 
strong men to go before the mass of men and to illuminate 
the path of jDrogress with their superior insight. It would 
be a great loss were there no surplus wealth in private hands 
to be used for public purposes. 

Finally, the fact cannot be overlooked that many things 
need to be done which the general public cannot be persuaded 
to undertake. It remains, therefore, for private parties to 
'do these things, or they must be entirely neglected. 



Introductory. 323 



SUMMARY. 

1. Expenditure differs from investment in that it is not directly produc- 
tive of revenue. 

2. The same enterprise may be managed by the State as an investment 
or as an expenditure, according to the object to be attained. 

3. The great modern increase in pubhc expenditures is to be judged, not 
simply by its amount, but by its productiveness. 

4. Public expenditure is inclusive, private expenditure exclusive. 

5. Public expenditure is cumulative in its results. 

6. Opposition to public expenditure is due to distrust of government, 
ignorance of modern developments, and false conceptions of the character 
of government. 

7. "With healthy government increase of public expenditure means prog- 
ress, but tliis principle is subject to important limitations due to circum- 
stances. 

QUESTIOITS. 

1. Define expenditure ; investment. What determines the basis on wliich 
a given public enterprise shall be conducted? Illustrate. 

2. What is the tendency of public expenditure as regards increase ? What 
possible explanation of this tendency may be offered? Under what condi- 
tions would either be correct ? 

3. What will justify an increase of expenditure? What are the natural 
limits of such increase ? 

4. What are the advantages of public over private expenditure? Are 
these true of all industrial fields ? 

5. Wliat are the objections to public expenditure? How far are they 
justifiable? How are the}^ to be accounted for? 

6. What is the law of increase of public expenditure? its limitations? 

LITERATURE. 

Marshall, A.: Economics of Industry. 

Adams, H. C. : The Relation of the State to Industrial Action ; Public Debts. 

Ely, R. T. : Problevis of To-day. 

Bastable, C. F. : Public Finance. 



CHAPTER 11. 

EXPENDITURES FOR SECURITY. 

Having considered the general principle of public expendi- 
tures, it now remains for us to notice some of its varieties 
and consider their relative claims. 

National Defense. — Under this head is included the 
cost of army and navy. If we leave for a moment our own 
country, which enjoys exceptional immunities from attack, 
and consider Europe, we shall find that we are in the pres- 
ence of the most serious item of the national budget. The 
six great powers of Europe spent in 1888 nearly nine hun- 
dred millions of dollars for this purpose. Moreover, the ex- 
pense is constantly increasing. From 1868 to 1888 the 
increase for the same nations was about seventy-three per 
cent, not counting expenses of actual war or interest on 
debts incurred. This increase is due in part to the more ex- 
tended scale on which military defense is now conducted, 
and also to new inventions which constantly make old arma- 
ments worthless and require new outlays. Of course, if we 
were calculating the cost of war as a whole we should have 
to add the immense loss of keeping hundreds of thousands 
of men in enforced idleness, and then the destruction of life 
and property during actual war. This indirect cost of war, 
while of immense importance to economic interests, is one 
which we can but allude to here. The direct expenditure 
for war, however, we must consider more carefully. 

In the first place, we must not forget that this outlay has 
some economic advantages. We in America are apt to com- 
miserate Europe unduly on her outlays for defense. It must 
not be forgotten that the men who compose the army derive 
immense benefit from the discipline to which they are sub- 



Expenditures for Security. 325 

jectecl. This makes them better producers as well as better 
soldiers ; in short, it makes men of them to a considerable 
degree. This fact, which is keenly appreciated, by intelligent 
Europeans, is neglected by us. Moreover, a certain part of 
the army is, of course, composed of persons who are naturally 
not a help but a burden, perhaps a positive danger, to society. 

Whatever may be the ultimate cost of national defense, it 
is demanded on economic grounds if no others. A sense of 
security and stability is indispensable to economic prosperity, 
and is worth all it costs. And yet if due care is taken we 
may expect a lessened need of military and naval expendi- 
ture, and while we should avoid " slothful overtrust " we 
should rely so far as possible upon peaceful guarantees. 

The United States is peculiar in the emphasis it lays upon 
a form of military expenditure which cuts but a small figure 
in European budgets, namely, pensions for past services in 
the army. General Garfield, when a member of Congress, 
favored a pension bill which appropriated the enormous sum 
of thirty-five millions for pensions. He claimed that the ap- 
propriation would never pass this amount, and that through 
the death of the pensioners the amount would steadily dimin- 
ish. Since then the appropriation has been quadrupled, and 
now equals or exceeds the direct cost of the most powerful 
standing army in the world. It is not in any sense a military 
necessity as regards either present or future. Immense 
resources which might be expended by the State with 
incalculable advantage are thus distributed among vast 
numbers of dissociated and to some considerable extent in- 
competent spenders who for the most part simply "use it 
up." A judicious public use of the same resources would 
confer equal benefit upon the pensioners themselves, and a 
like benefit upon all the community, but it would not in- 
fluence so many votes. 

Internal Security. — Under expenditures for internal se- 
curity are included the cost of our police system in all its 
branches — including constables, sheriffs, etc. — and that of our 
judiciary system, since both of these are occupied almost 
2% 



326 Outlines of Economics. 

wholly in securing person or property from injury. This 
expense varies greatly according to circumstances. Among 
primitive peoples, and, indeed, until civilization has made 
some progress, nothing like a modern police system is known. 
Individuals protect their own property and persons, the right 
of vengeance being recognized and constituting a system of 
summary justice in charge of private enterprise. The in- 
crease of expense in this connection therefore marks at first 
a new branch of public enterprise, later a more perfect per- 
formance of this function, and closely allied to this a more 
humane treatment of offenders. When more than two hun- 
dred offenses were punishable by death the cost of dealing 
with a criminal was slight. I^ow for most crimes he is 
subjected to a long imprisonment, which becomes more ex- 
pensive as increased efforts are made for his reformation. 
When we remember how largely society as a whole is respon- 
sible for the existence of crime and how great Is the injustice 
necessarily involved in its punishment, as well as the gain 
even in economic resources from the reformation of the 
criminal, there is no expenditure which w^e ought to make 
more willingly than that for the reformation of criminals. 

Another cause of increased expenditure is the increase of 
Avealth and of the temptations which it excites. New inter- 
ests require new safeguards and suffer increasingly from 
criminal interference. Not only are social relations more 
delicate than formerly, but means of injury are much more 
potent. The inv^ention of dynamite necessitates precautions 
once unthought of. 

For these and other reasons the expenditure for this pur- 
pose has rapidly increased. In France the increase from 
1822 to 1890 was over one hundred per cent, while in Eng- 
land from 1825 to 1890 it was over three thousand per cent. 
This means, not that England is growing more criminal than 
France, but that she is caring for more interests and caring 
for them more humanely than her neighbor. 

Here, too, we ought to expect an ultimate diminution of 
expenditure, but it must come slowly and by a reformation, 



, Expenditures for Security. 327 

not of criminals, merely, but of the social conditions that 
produce them. Prevention rather than punishment or even 
reformation will be the goal of a wise society. 

Administrative Supervision. — This is in reality an 
extension of police functions, though its agents are more 
often known by some other name, as commissioners, inspect- 
ors, etc. Its purpose is likewise public security, though not 
so much against open violence as against unsuspected and 
indirect dangers. This function is really a revival of a 
mediaeval system, denounced b^^ Adam Smith and discarded 
in part during the earlier part of the century. It must be 
remembered, however, that its present form is far better than 
the discarded one. It includes the inspection of sewers, 
tenements, mines, factories, ships, steam boilers, tramways, 
railways, etc., the testing of articles of food, such as milk, 
meat, etc., and also of many articles, like gun barrels, silver 
and gold plate, etc., where only expert examination can de- 
termine quality. 

We cannot here discuss the extent to wdiich such legisla- 
tion should be carried. It is important, however, to notice 
that the exigencies of modern life have actually forced it 
upon us in spite of the most vigorous opposition on the part 
of believers in ultra-private enterprise. The more compli- 
cated our civilization becomes, and the more . sensitive our 
social organization, the more indispensable such protection 
is found to be. In an increasing number of cases men can- 
not tell what they are buying or discern w^hether it secures 
their interests or not. As Professor Jevons tersely says : 
" While it is a fact that people live in badly drained houses, 
drink sewage water, purchase bad meat or adulterated gro- 
ceries, it is of no use urging that their interests would lead 
them not to do so. The fact demolishes any amount of pre- 
sumption and argument. We may assume that no consumer 
Avants to buy putrid sausages, poisonous pickles, dangerous 
guns, or fraudulent plate. Thus the government official wdio 
excludes these things from public sale actually assists the 
purchaser in carrying out his own desires." 



328 Outlines of Economics. 



SUMMARY. 

1. Expenditure for national defense has greatly increased in recent years, 
in Europe by the maintenance of armies, and in the United States by the 
payment of pensions, an expenditure only nominally for the purpose of de- 
fense. 

2. ]S[ational defense is an economic necessity, and is, in many ways, re- 
munerative. 

3. Expenditure for internal security is closely allied and likewise rapidly 
increasing. Increase means, not wastefulness or increasing danger, but im- 
proved service. 

4. Administrative supervision is a necessary form of protection to so- 
ciety revived after a brief suppression. 

QUESTIONS. 

1. What is the cause of increased expenditure for security? Is it justifi- 
able? How far is its necessity a misfortune ? 

2. What is the real connection between pensions and national security? 
How far is such payment justifiable ? 

3. What is the significance of increased expenditure for internal security ? 
How mucli of the increase is due to new dangers? 

4. What has been the tendency regarding administrative supervision? 
How much is included under this term ? 

LITERATURE. 

See works already cited, especially 

jevons, W. S. : The State in its Relation to Labor. 



CHAPTER III. 

EXPENDITURES FOR THE POOR AND THE UNFORTUNATE. 

This includes primarily the paupers, the deaf, the blind, 
the insanCj and the feeble-minded, v/ho from their natural 
defects are unable without assistance to hold their own in 
the struggle for existence. We might also include here 
those extraordinary cases of sufferers from fire and flood 
and other widespread and sudden misfortunes, but as these 
are less important we will omit them from our present con- 
sideration. 

In earlier ages the defective classes w^ere sometimes most 
summarily disposed of, but the moral development of the 
race makes this impossible. For a long time, however, their 
only resource w^as begging, as we see from the constant allu- 
sions of the New Testament and other ancient books. This 
doubtless assured them a most uncertain and wretched sub- 
sistence. In the Middle Ages they were systematically but 
insufiiciently and unwisely cared for by the Church, whose 
great monastic establishments were largely used for this 
purpose. This system was enormously expensive relatively 
to its results, and its obvious abuses Avere one of the chief 
causes leading to its abandonment. It demoralized the poor, 
neglected the defective, and treated the insane with almost 
incredible cruelty. It Avas a palliative but not a remedy. 

Government care of these classes is now recognized by all 
as a necessity. Their removal from immediate contact 
with the rest of society, and systematic treatment of them by 
experts, is not only a great advantage to them but an im- 
mense relief to society. 

From the standpoint of economics little need be said re- 
garding the treatment of the insane and the feeble-minded. 



330 Outlines of Economics. 

The expense is inevitable and should be cheerfully borne, for, 
though abnormal beings, they feel, and a human feeling is 
an ultimate thing, a good or an evil which we who have the 
power to determine its character must wholly respect. Here, 
as elsewhere, however, that expenditure is best justified 
which tends to prevent insanity by the removal of the causes, 
sanitary and otherwise, which produce it. If our insane 
asylums constantly increase it will suggest that the State 
fails to take care of its citizens until tliey have become insane. 

The j)i'oblem of the blind and deaf is primarily one of 
education, which must be of a special character such as 
local facilities cannot furnish. By means of such education 
these unfortunate members of society can become often so 
useful as to be no burden to society. It is needless to 
say that this is not all of the problem. Tliey must exist, and 
we are not at liberty to decide the matter regardless of their 
convenience or well-being. The worst thing that can befall 
a man is to be deprived of all opportunity to be useful to his 
kind. This opportunity the State should, if possible, provide 
for those who cannot obtain it unaided. 

The Difficulties of Poor Relief are far greater than 
those of the cases just mentioned, and its economic bearings 
indefinitely more serious. The reason is simply that in the 
case of the insane, the deaf, the blind, etc., nature has 
sharply drawn the line between them and the rest of society. 
'No matter what advantages they enjoy, no one is tempted 
to become blind or insane for the sake of enjoying these 
advantages. Not so with pauperism. The majority of men 
under present conditions are necessarily poor, as poor, many 
of them, as paupers themselves, so far as accumulations go. 
Now, if the dependent poor are treated better by the State 
than the independent poor are treated by society, thousands 
of the latter will join the former. Discouraged by the fact 
that by their utmost exertions they get less than they could 
receive by no exertions at all, they naturally choose the lat- 
ter. The history of poor relief is full of such cases. Early 
in this century, when the industrial revolution had 23roduced 



Expenditures foe the Poor and Unfortunate. 331 

great suffering in England, a system of relief was adopted 
which pauperized thousands and immensely aggravated the 
difficulty. An allowance was given to each laborer in pro- 
portion to the size of his family. If he earned enough to 
meet the legal requirements he received nothing. If he 
earned less the balance was paid by the community. If he 
was out of work the community paid his wages, etc. Now, it 
seems just that a man should be guaranteed a minimum in- 
come by society ; but what was the result ? The measure 
was supported both by employers and employees. The em- 
ployer could now cut wages without resistance on the part 
of employee. The men could live whether they worked or 
not. The wage-earning population became, it is said, mu- 
tinous and rebellious, intimidating the overseer. Poor rates 
became so heavy that it is said that some landowners aban- 
doned their farms rather than pay the taxes. The law was 
long ago repealed, but the mischief it had wrought is by no 
means eradicated yet. 

In America we have had no legislation so mischievous as 
this, but our experience has been most unsatisfactory. The 
relief of the jDOor has been so managed as to increase pau- 
perism in many instances, especially when the poor receive 
relief in their own homes, and, worst of all, when such relief 
is furnished in money. Fraud in a thousand forms has re- 
sulted, and in all cases where such relief is loosely adminis- 
tered pauperism has been increased and the poor have been 
degraded. Experience has taught us the recognition of cer- 
tain principles which we can only barely outline here. 

1. A careful distinction must be made between the victims 
of temporary distress and paupers. The first lack goods 
merely, and may be helped without danger, often preferring 
positive starvation to the demoralization and humiliation of 
relief. They are very few compared with the other class, 
and often find private help sufficient. The second class lack 
character, and must be treated accordingly. 

2. Attention should be directed to fundamental rather than 
surface needs. If a man lacks food because he is lazy it is 



332 Outlines of Economics. 

his laziness rather than his hunger which should receive chief 
attention. That is, the treatment of paupers should he dis- 
tinctly reformatory in character. This cannot be too much 
emphasized. Chronic pauperism rests largely on defects of 
character. It is more difficult to reform paupers than crim- 
inals, and their condition is hardly less degraded. Crime is 
misdirection of energy; pauperism, lack of energy, or, as it 
has been well defined, pauperism is under-vitalization. The 
greater leniency accorded to paupers is due, not so much to 
their moral superiority over criminals, but to the fact that 
they are seemingly less dangerous. 

3. Pauperism is closely connected with vice and disease, 
and should be treated with a view to the restoration of physi- 
cal and moral health. Vicious practices should be stopped, 
and, if possible, the tendency to them eradicated. If by 
any possible argument a man may claim the right to spend 
in vicious indulgence the proceeds of his own industry no 
one will accord him the right to Sf)end thus the bounty of 
society. 

4. Pauperism is largely the result of a bad environment 
and wrong education. So far as possible the environment 
must be changed and the education corrected. 

5. Above all things, industry must be inculcated. The 
labor of a pauper may be worth little to society; it is inval- 
uable to his own manhood. 

6. From the foregoing the conclusion has been generally 
drawn by American experts that, so far as possible, paupers 
should not be relieved in their own homes, where supervision 
and reformatory efforts are difficult, but in institutions under 
tlie direction of experts. The aim of American reformers 
has been either the total abolition of outdoor relief or its re- 
duction to a minimum. Another idea is that of Germany, 
as seen in the " Elberfeld system," so called from the city 
which has tried it with great success. It is the reduction of 
indoor relief to its lowest terms and the substitution therefor 
of outdoor relief, relief in the homes of the needy. This 
prevents the breaking up of homes and enables the dis- 



Expenditures for the Poor and Unfortunate. 333 

pensers of public charity to give only so much as is needed. 
Cases which would require full support in an institution 
often find all the relief required in partial support in their 
own homes. Sometimes partial outdoor relief is required 
temporarily only, as when the breadwinner is removed by 
death and a widow is left with small children. This system 
keeps the family together, and it soon takes its place again 
among other independent families. It seems to the writer 
that the ideal of the Elberfeld system is a higher one, but it 
requires a pure and efficient civil service such as German 
cities have, and it necessitates also a general cooperation of 
the best social elements as friendly visitors with the officers 
of government. Private persons, in our defective system of 
administration, do not cooperate with government to the 
same extent as in Germany, and, where the " spoils " sj^stem 
prevails in the civil service, " wire-pullers," politicians of 
"the baser sort," take the place of trained experts in the 
service of government. Civil service reform is a question of 
economics as well as humanitarianism, for a poor civil serv- 
ice is in its effects cruel and wasteful and an obstacle to prog- 
ress in all departments of social life. 

7. The treatment of paupers should not be such as to 
make their lot attractive. It does not follow, however, that 
they should be starved or treated with gratuitous severity 
in any form. A rigid discipline and vigorous reformatory 
measures will do more to deter from voluntary pauperism 
than any amount of starvation and neglect. Severity is often 
tlie truest kindness. A tramp will endure exposure and des- 
titution with fortitude who will be appalled at the sight of 
a woodpile and sawbuck. 

8. Much pauperism is due to old age and failing health, 
coupled, perhaps, with previous improvidence or incaj^acity 
now past remedy. For such there is nothing to prescribe but 
humanity and kindness to ease the pangs of dissolution. 

9. Finally, and most important of all, pauperism, though 
an almost incurable malady in its advanced stages, is largely 
preventable. The State can do little to prevent blindness 



334 Outlines of Economics. 

or deafness, it can only alleviate the misfortune. But pau- 
perism is, to a great extent, the result of bad social organiza- 
tion. A pitiless system, based on unmitigated self-interest, 
an exaggeration of individual as opposed to social rights, a 
legislation which favors the strong, even a well-meant legis- 
lation which is negligent and unwise — any of these causes 
may multiply pauperism many fold. Nowhere does the 
duty of preventive legislation and wise, liberal preveiitive 
expenditure appeal more loudly to the conscience of society 
than here. Comparatively, at least, prevention is cheap and 
cure expensive, prevention is easy and cure difficult, preven- 
tion is profitable and attempted cure of little avail. 

There are those who deny that the problems here discussed 
are economic problems. If these things in their cost to so- 
ciety, in their loss to productivity and their demoralization 
of organized industry, do not affect the problem of man in 
his relation to wealth, what things do ? 



Expenditures for the Poor and Unfortunate. 335 



SUMMARY. 

1. The poor and unfortunate were formerly uncared for, then cared for 
by the Church and finally by the State. 

2. The care of the deaf, the blind, and the insane is purely one of detail, 
tlie duty being admittedly a public one. 

B. The treatment of paupers is much more difficult, owing to the ease 
with which wrong treatment increases their numbers. 

4. Paupers are in general the victims of weakness of body and character. 
Tlieir treatment should be distinctly reformatory in character, the inculca- 
tion of habits of indnsfy being especially important. 

5. Pauperism should not be made attractive nor treated with needless 
severity when due to old age, etc. 

6. Pauperism should be prevented so far as possible, cure being both ex- 
pensive and difficult. 

QUESTIONS. 

1. What victims of misfortune are the natural wards of the State? 
Why? 

2. What was the earliest treatment of defective persons ? Why? What 
has changed this policy ? 

3. What is the objection to leaving such to private charity ? 

4. What is the objection to church supervision and control ? How did it 
work unfavorably ? 

5. Wliat is the goal of public effort in behalf of the deaf and blind? 

6. Mention the difficulties in poor relief. What is the real cause of 
pauperism ? 

7. What should be the aim of State relief? 

8. What was the experience of earlier English legislation ? 

9. What is the Elberfeld system ? the difficulty of introducing it in the 
United States ? 

10. Why are leniency and kindness difficult or even dangerous in dealing 
with paupers? 

LITERATURE. 

Toynbee, A. : The Industrial Revolution in England. 
Boies, H. M. : Prisoners and Paupers. 

Proceedings of the National Conference of Charities and Correction, a 
list of nineteen very valuable Rextorts. 

The literature upon this subject is extensive, but not wholly satisfactory. 



CHAPTER IV. 

EXPENDITURE FOR EDUCATION. 

Of all the expenditures of modern times that for education 
has grown most rapidly and constantly in the development 
of the modern State. We noticed the remarkable increase 
in England of the expenditure for internal security and 
reform of criminals, an increase of nearly 3,000 per cent 
in about seventy years. But in the same period the expen- 
diture for education increased nearly 5,000 per cent, or over 
six times as fast as the average of the other civil departments 
of government. In France the expenditure for education 
was, in 1869, the last year of peace under the second empire, 
twenty-five and a half millions of francs; in 1883, after four- 
teen years of immense financial difiiculties, the expenditure 
for education was one hundred and thirty-three and eight 
tenths millions — an increase of 425 per cent, while the expen- 
diture for internal security slightly decreased during the 
same period. In England the expenditure for education is 
second only to that for internal security ; in France it is sur- 
passed only by that for public works, which, it must be re- 
membered, is largely a revenue-bearing investment and not 
expenditure. The record in other countries is similar if not 
so marked, but we in the United States have rehitively lost 
ground in this respect. If we have advanced our progress 
has not been nearly so rapid as that of either of the two 
countries named. 

In ancient times, with a few notable exceptions, education 
was left to private individuals. During the Middle Ages it 
was left to the Church, whose services to education at this time 
in her monastic institutions are often underestimated. With 
the seizure of church property by the various monarchs of 



Expenditure for Education. 337 

Europe, and with a change of ideas regarding the functions 
of the State, the State was, however, compelled to take up 
tlie work of education, and with the growth of popular gov- 
ernment the necessity of education was felt and emphasized. 
It is generally admitted that one cause of the defeat of 
France by Germany in the last war was the superior educa- 
tion of the German people. With the establishment of the 
republic France recognized the necessity, both military and 
political, of general education and vigorously applied herself 
to the task, as we have seen. 

Education had become so firmly established a function of 
government in the days of Adam Smith that with all his dis- 
like for State activity in such matters he admitted its legiti- 
macy. Both he and his followers, however, favored State 
aid to primary education only. Higher education they con- 
sidered a luxury for the rich which they should pay for. 
State aid to such was class legislation. This is an example 
of the narrowness of views to which this principle leads. 
While recognizing the public danger of illiteracy they char- 
acteristically regarded all the benefits of higher education as 
matters of private concern only — private luxuries. If a poor 
boy who could not afford the " luxury " of a higher educa- 
tion had talents to be a great statesman, inventor, or scholar, 
the State should not seek to develop these. They were 
his affair. How plain it is that such a policy is ruinously 
wasteful of the best treasures which the State possesses, the 
powers and faculties of its citizens ! Whatever may be said 
as to what private beneficence might do, we must consider 
what it does do and has done. Does it offer any sufficient 
guarantee that the available resources of the State will be 
utilized ? It is the function of private beneficence to supple- 
ment public activity. This it does do to some extent, and 
will do more when the value of State enterprise is appreci- 
ated. 

It is urged against public maintenance of higher education 
that only a few can or will avail themselves of its advantages, 
and the many are burdened for their sake. This is true of 



338 Outlines of Economics. 

our courts. Not many people have lawsuits, but all help 
maintain the courts. It is true in a measure of every activity 
of government. Not a law is passed, not a tax imposed, 
whose benefits or whose burdens are distributed with perfect 
justice. It is as just as may be. But this is not tlie ques- 
tion. The advantages offered by a high school, academy, or 
university are not simply the privilege of individual instruc- 
tion enabling a person to carry away a luxury which profits 
only him. Do such persons profit the State through the ed- 
ucation thus acquired ? To ask this question is to spare the 
need of the answer. There is many a university whose entire 
cost has been returned to society in clear cash by the service 
of a single one of its students, a service made possible by his 
education. But this is as nothing to the general influence 
exerted by people thus educated. They fill responsible posi- 
tions, public and private, positions in which society exacts 
large capacities which only educated men can supply. 

It is urged in view of the numerous private universities 
and colleges in the United States that private schools might 
render this service. But why should they? It is the State 
in particular which demands an ever-increasing number of 
competent men, ought to demand them, ought to demand 
more than it does, would do so if they were to be had. What 
more natural than that the State should furnish them ? We 
justify State primary education on the grounds that the 
State requires of all the duties of citizenship ; we should 
justify State universities on the ground that the State requires 
of many the duties of legislative and administrative service, 
and of all the development of their powers for the service 
of society. 

But private colleges and universities do not adequately 
perform this service — cannot do so from the very nature of 
private enterprise. That a few such schools are of the high- 
est rank none will deny, though even here the "highest rank" 
is lower than it need be on account of the waste of private 
resources. As a rule these are most wastefully employed. 
The State of Ohio has thirty-five colleges. Was such an in- 



Expenditure for Education. 339 

vestment wise? What would liavebeeii the result had these 
resources been united in a single university ? Tliis could not 
be, we are told, because no unifying power controlled the in- 
vestment. Certainly; it is an example of the uncohesive 
and wasteful character of private enterprise in education. 
The unifying ])Ower needed was that of the State, the only 
one possible. Its university struggles weakly against such a 
rival league. It loses the majority of religious students of 
the State, and then is called irreligious ; it educates few 
students and so educates few sympathies, receives few be- 
quests and meager appropriations. If the private educa- 
tional enterprise of the State were efficiently consolidated it 
would justify itself. As it is it represents divisive forces 
descended from an obsolete sectarianism. All honor to re- 
ligious convictions past and present ; but the confessedly dis- 
astrous influence of sectarianism upon private education em- 
phasizes the need of cooi'dination and the wisdom of private 
beneficence aiding rather than retarding the work of the 
State. The United States has four times as many colleges 
and universities as Germany, but the latter have more students 
and more professors than the former. Which system pro- 
duces greater results in instruction and research ? The 
function of a university is not simply instruction but also re- 
search. Few expenditures produce greater returns, direct 
and indirect, than this. Notice the remarkable results of re- 
search in German universities in the last half century, par- 
ticularly in sanitary science. The disgovery of a simple test 
for milk a few years since by a professor in an American 
State university has revolutionized the dairy business of that 
and other States. As a simple matter of economic production 
a body of expert investigators is one of the most profitable 
investments of government. Such a body can only be main- 
tained by the State. Otherwise they must sell their services, 
divided and inefficient, to speculators who appropriate the 
results of their investigations. 

The expense of modern research ])ractically necessitates 
resources which as a rule only the State can adequately fur- 



340 Outlines of Economics. 

nish. Especially do the physical sciences, whose development 
has created so large a part of modern wealth, call for increas- 
ing outlays for their continued development. Private benefi- 
cence has done much and accomplished notable results, but by 
competing with the State rather than supplementing its work 
it has produced a superfluous number of embryos and has not 
yet achieved a single perfect development.* 

We have considered at length the case of higher education 
because it is the only debatable portion of the problem of 
public education. Objections to primary education are now 
questions of detail, not of principle. It is interesting to note, 
however, that government in all enlightened countries has 
altogether abandoned the mistaken policy advocated by Adam 
Smith. It regards higher education not as a luxury which 
the rich should be left to pay for, but as a necessity of social 
development. 

Under the head of education must be included art galleries 
and museums and many other agencies not directly employed 
in giving instruction. The impression should be overcome 
that the purpose of such things is the amusement of specta- 
tors. They are repositories of material for scientific study 
and investigation, and under the influence of science are 
rapidly ceasing to be curiosity shops. They are an indispen- 
sable adjunct of higher education. Art galleries have a par- 
ticularly broad and beneficent influence upon society. Of 
course, if beauty has no value, if a house has no other use 
than shelter, and paint no other purpose than to preserve 
timber, if a sunset might as well be mud color as rainbow 
tinted, if exqiiisiteness of form and color and the manifold 

* It is not intended to disparage the results of private beneficence in 
higher education. Not only has it accomplished great results directly, but 
it has created the sentiment which now makes public effort possible. The 
lack of coordination, also, which has so greatly lessened its efficiency, was 
not its fault, but was inherent in the situation. Its record is that of self- 
denying and heroic effort against overwhelming difficulties, and the wonder 
is that it has accomplished so mucli. We do not estimate lower than others 
the results of this system ; we estimate higher than others the possible 
results of a wiser system, which this should supplement. 



Expenditure for Education. 341 

movements of grace by which Nature speaks from her soul 
to the senses — if these are not worth the trouble it costs to 
perceive them, then art galleries and much more besides 
will iind little to justify their existence. But if such 
things have value, if art is the interpreter of nature and 
a means of using wealth which confers supreme satisfactions, 
then it is preeminently the State which should make such 
expenditure. Only so can the rare and costly works of 
genius be made a general good and enabled to confer their 
greatest service. 

We often hear of public luxury as though it were a repre- 
hensible thing. What do we mean by public luxury ? We 
have seen that luxury consists in a false distribution of 
wealth. When a rich parvenu buys a masterpiece of art and 
locks it up it is a luxury. It is so utilized that it renders 
little service to him or to others, and so attains but a frac- 
tion of its possible utility. If he were the one man in so- 
ciety able to appreciate or profit by that picture it would 
not be a luxury, but a wholly justifiable expenditure. Of 
course that can never be the case. If, now, the government 
buys that picture and puts it where the largest possible 
number of people can see it, it cannot be called a luxury. 
It renders its greatest possible service to society. The 
writer has no hesitation in expressing the conviction that a 
public art gallery and a public library should be the aspira- 
tion of every community and the immediate attainment of 
all those which have a reasonable development of private 
affluence. This is not luxury, but the best possible safe- 
guard against luxury, which by the misapplication and non- 
utilization of wealth makes us poor in our abundance. 



342 Outlines of Economics. 



SUMMARY. 

1. In modern times expenditure for education has enormously increased 
in highly civilized countiies. 

2. Education as an activity of the State was partially admitted even by 
Adam Smith. 

3. Higher education, however, was regarded as a luxury of the rich, to 
be left to private enterprise. 

4. Higher education has now been generally added to the educational 
work of the State. 

5. This is necessary to the maintenance of free institutions and to the de- 
velopment of needed individual talents. 

6. A perfectly equal distribution of educational as of other advantages 
oflered by the Slate is not possible. 

7. Private universities and colleges have not sufficiently provided for 
higher education nor wisely economized social resources, owing to a lack of 
coordination in their efforts. 

8. Art galleries and museums are a part of the machinery of public edu- 
cation, and are not to be condemned as luxuries. 



QUESTIONS. 

1. What did Adam Smith think of elementary education by the State ? 
of higher education ? Why did he distinguish them ? AVas he right ? Why ? 

2. Why should the State provide for elementary education ? for higher 
education? How far do the two differ ? 

3. What is the defect of private management of higher education? Is 
this defect inherent? If private enterprise performed the work equally well 
would it be better to leave the service to it ? 

4. What is the function of art galleries and museums ? 

5. What is the difference between public and private luxury? 



CHAPTER V. 

EXPENDITURE FOR COMMERCE, DIPLOMACY, AND GOVERN- 
MENT. 

In this chapter we consider a number of expenditures 
which are grouped together, not because of any inherent 
connection, but because all must be considered briefly, and 
they are all relatively slight in their importance. 

Commerce. — Under this head are included, first of all, 
the maintenance of those industrial facilities which we have 
already considered in Part I : roads, bridges, canals, im- 
provements in rivers and harbors, lighthouses, and many 
others. But little time need here be spent on this branch of 
public expenditure farther than to emphasize its importance 
and its necessarily public character. Most of these improve- 
ments and conveniences cannot be arranged so as to furnish 
a direct revenue sufficient to tempt private enterprise to 
undertake them. This is clear in the case of lighthouses, 
and even in the case of roads where private ownership and 
toll is possible no one would now return to the toll roads. 
The amount of expenditure will, of course, vary with a great 
variety of circumstances. In general, however, we may say 
that the State should act according to much the same rules 
as a wise individual would follow in the same position. We 
know, of course, that subdivided private enterprise is nig- 
gardly in its outlnys for such purposes; but imagine a single 
person, a shrewd business man, in possession of all tlie re- 
sources of government and managing them as such men 
manage their business; would he leave our roads in their 
present condition? If not, we should not either.* 

* Pullman, 111., furnishes an illustration. The company owning the town 
finds that it pays to sprinkle the streets because, among other things, it is 
not necessary to paint the buildings so often as would otherwise be required. 



344 Outlines of Economics. 

Post office, telegraph, and railway lines are primarily 
commercial in their purpose, and subject to the same con- 
siderations, but they are generally managed as investments, 
the last especially yielding a considerable revenue. The 
difference of method between expenditure and investment is 
purely one of convenience, the latter method being prefer- 
able when it is feasible to collect the revenue in the opera- 
tion of the enterprise and when the enterprise is of especial 
advantage to certain interests, or liable to abuse if its bene- 
fits are furnished without charge. 

The cost of maintaining a currency falls to the State. 
This may in like manner be defrayed by a charge for coin- 
age, and in other ways. Closely allied to this is the estab- 
lishment and maintenance of a system of weights and 
measures, a slight but important and necessary exj)ense. 

In some countries special codes of commercial law and 
special commercial tribunals are maintained in the direct and 
exclusive interest of commerce. Bounties and subsidies, 
which we have already discussed, are, of course, expenditures 
to be included in this chapter. 

Diplomatic and Consiilar Service. — This is not wholly 
but very largely a service in the interests of commerce. The 
modern State in its foreign relations is largely, if not chiefly, 
a social organization for the purpose of securing commercial 
and other economic advantages to its people. International 
disputes, and even wars, are seldom concerned with religion, 
or national honor, or claims of sovereigns, or even race 
antipathies, as was the case formerly. They are about eco- 
nomic advantages. These in different ways make up the 
principal duties of consuls and ambassadors. 

G-ovemnient. — All the expenditures we have been con- 
sidering are expenditures hy government. We have to con- 
sider now certain expenditures for government ; that is, 
expenditures for certain governmental functions too general 
in character to be ranged under any of the heads we have 
considered. Such are expenditures for legislation and ad- 
ministration. In some countries, notably England, legis- 



EXPENDITUKE FOE CoMMEECE, DIPLOMACY, EtC. 345 

lators get no salary. The result is a development of public 
spirit on the part of wealthy and able men who, in England, 
serve the public with as much disinterestedness as in any 
country in the world. On the other hand, the system seems 
to prevent poor men from entering Parliament, though this 
difficulty is partly met by private subscriptions in their be- 
half. The success of this system in England is doubtless 
largely due to peculiarities of the people and the distribution 
of wealth. That country has many wealthy men, who, by 
reason of social and other conditions, are relatively free 
from the spirit of money-making. In new countries wealthy 
men are largely successful money-makers, who are not likely 
to lay aside their habits of looking out for a good bargain if 
they are not made to realize their obligations by the pay- 
ment of a salary. For this and other reasons the new coun- 
tries founded politically by Englishmen have adopted the 
principle of paying legislators. 

The amount of the salary is a matter of dispute. Unques- 
tionably no attempt should be made to pay members of 
Congress the full pecuniary value of their services. This 
would be offering a strong mercenary inducement, and 
would probably attract mercenary men. On the other hand, 
petty and inadequate salaries are a provocation to fraud, 
neither appealing to the generosity of the rich nor satisfying 
the necessities of the poor. It would seem that the general 
principle governing the payment of salaries ought to apply 
here in full force. This we have seen to be the standard of 
life; that is, an adequate provision for the life of the official, 
due regard being had to the influence of his position upon 
the necessary demands of his establishment. The social and 
moral importance of keeping families together, the expense 
of change of residence, and the social demands of life in an 
official center should be fully considered in making the nec- 
essary estimate. 

The administrative department includes not only the offi- 
cial head of the nation, but that of various subordinate 
officials connected with this function. In all countries such 



346 Outlines of Economics. 

services are paid, and in the case of monarchies very highly 
paid. At the center of government are those ornamental 
and yet indispensable functions of government which are so 
expensive. The importance of these functions is variously 
estimated in different countries and paid accordingly. The 
French Republic pays its president over fifteen times as much 
as does the United States. No rule can be laid down farther 
than that the nation must not demand socially more than it 
pays in appropriations. 

Tax Collection. — This is an expenditure of government 
which aggregates a large amount. We may say of this, as 
of every other expenditure for government, that it is not 
a consumption of wealth by men in a social capacity for 
the purpose of conferring direct satisfactions, as is the case 
with art galleries, schools, etc., but a production expenditure 
which should be made as small as possible, relatively, to the 
work to be accomplished. Of course reductions must be 
limited by efficiency and the necessities of an honest service. 



Expenditure fur CommercEj DirLOMACY, Etc. 347 



SUMMABY. 

1. The government expenditures for commerce include the cost of main- 
taining roads, bridges, harbors, etc., the cost of maintaining a currency, 
and commercial law and tribunals. 

2. The diplomatic and consular service is primarily an expenditure for 
commerce. 

3. A large item in government expenditure is for the maintenance of 
legislatures and administration. 

4. The salaries of public officials should be measured neither by the value 
of their services nor by their ability to forego payment, but by the require- 
ments of living in official station. 

5. The expense of tax collection is an expense to be minimized rather 
than extended by the development of society. 

QUESTION'S. 

1. "What is included under government expenditures for commerce ? 

2. Should these expenditures be minimized or not with the progress of 
society ? 

3. What is the chief reason for the existence of a diplomatic and consular 
service ? In what respect does this differ from former conditions ? 

4. What are the advantages of the English system of unpaid legislators ? 
its disadvantages ? Would it work equally well with us ? Why ? 

5. If legislators are to be paid for their services what law should deter- 
mine the amount of their salary ? 

6. In what respect does the expense of tax collection differ from that of 
many other functions of government ? 

LITERATUBE. 

Bastable, C. F, : PvMc Finance. 

The principal literature on the subject is by French and German writers, 
and is therefore not enumerated here. 



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